We’re unsure which is worse: the pre-election analysis or the post-election analysis? It doesn’t really matter because it’s all speculation, and it’s speculation that will likely be proven wrong.
We were told pre-election that Hillary Clinton was the status quo; she was the known quantity. Because she was the known quantity, stock prices would climb if she were elected. Bond prices, on the other hand, would fall (and yields would rise). Bond prices would fall because investors would be less risk averse and the Federal Reserve would be more emboldened to raise interest rates.
Of course, we all know the outcome of the election. Donald Trump won and now financial markets are putatively saddled with uncertainty. Because market participants are unsure what they’ll get with Trump, we were told pre-election that Trump would be bad for stocks and good for bonds, which are haven investments.
Out of the gate, Trump’s victory set stocks back. Indeed, late into the election night, stock futures priced the Dow Jones Industrial Average for an 800-point drop at the market open on Nov. 9. But as the night progressed, passions cooled. The Dow opened lower on Nov. 9, but only 100 points lower. Within a half hour, the Dow was trading positively.
The Trump victory also unexpectedly set bond prices back. The yield on the 10-year U.S. Treasury note jumped 20 basis points to over 2%, a yield unseen since January. Not surprisingly, mortgage rates also jumped, and they jumped in a big way: Wednesday saw the single-biggest move higher in mortgage rates since the days of the taper tantrum in mid-2013.
Though we’ve read accounts that a Trump victory, encumbered with all its uncertainty, would put Fed officials on their heels (less likely to raise interest rates), traders disagree. Traders are pricing federal funds rate futures contracts with a 76% chance of a rate increase next month. Many credit-market participants appear to agree with the traders. Bond yields across the spectrum rose after the election.
So, what impact will the election have on our business?
Last week, we speculated that the election wouldn’t have much of an impact. Yes, mortgage rates have moved higher. Then again, they might have moved higher regardless of who won. Most everyone thought a rate increase was in order if Clinton had won, so they likely would have risen had she taken the White House. Many credit-market participants appear to believe a rate increase is in order even though Trump has taken the White House.
We expect to see higher mortgage rate volatility into the Federal Reserve’s Dec. 14 meeting. We still expect a rate increase to emerge from the meeting, but this doesn’t mean that mortgage rates will continue to trend higher. As we saw with the Fed interest-rate increase last year, a higher fed funds rate doesn’t automatically translate into higher mortgage rates.
Rhetoric is one thing, reality is another. The reality is that housing and mortgage lending are still on firm ground, and they would have remained on firm ground regardless of who won on Nov. 8.
Still Going Strong
The data continue to support our assertion that housing and mortgage lending remain on firm ground.
Data presented at CalculatedRiskBlog.com show that home builders continue to post strong order flows. The seven largest builders showed combined net home orders of 24,648 for the quarter ended Sept. 30, up 8.4% from the comparable year-ago quarter.
Meanwhile, the NAR is projecting an uplift in sales. The NAR projects that existing-home sales will grow 2% next year to average 5.46 million units. The trend is expected to continue into 2018, with sales rising an additional 4% to average 5.68 million units.
On the mortgage-lending front, lenders continue to lend on decent demand.
Banks reported that demand for most types of purchase mortgages strengthened over the third quarter, according to data compiled by the Federal Reserve. Over the third quarter, banks reported stronger demand for most categories of purchase mortgages. In particular, banks reported stronger demand for GSE-eligible residential mortgages.
Demand should continue to rise, given that lenders continue to ease credit standards. The Mortgage Bankers Association reports that credit availability eased in October. The MBA’s Mortgage Credit Availability Index increased 2.6% to 171.3 in October, up from 167 in September.
We liked the outlook for housing and mortgage lending as we headed into 2012, 2013, 2014, 2015, and 2016. We like the outlook for housing and mortgage lending as we head into 2017.