Trump Victory Pushes Mortgage Rates Up, Housing Stocks in Freefall

Trump's victory in the 2024 Presidential election on Wednesday, November 6, has had a direct impact on the financial markets, especially with a noticeable rise in the U.S. 10-year Treasury yield, which is influencing mortgage rates. Mortgage rates, which tend to track Treasury yields, have followed suit, pushing borrowing costs higher for homebuyers.

On Wednesday, the average rate on a 30-year fixed mortgage jumped by 9 basis points to 7.13%, according to Mortgage News Daily. This marks the highest rate since July 1, although it wasn't as sharp an increase as some analysis had feared. Still, it's clear that the days of historically low mortgage rates are behind us. And for buyers, this shift has significant implications for affordability, especially as home prices remain elevated in many parts of the country.

Matthew Graham, chief operating officer at Mortgage News Daily said, "The expectation among bond traders coming into the election was that rates would move higher in the event of a Trump victory and especially a red sweep. While the latter is not yet clear, the former is enough for another bump to rates that have already risen abruptly with Trump's victory odds."

As expected, housing stocks responded negatively to the rising rates. Publicly traded homebuilders like Lennar, D.R. Horton, and PulteGroup all experienced significant declines, each dropping more than 4% by midday trading on Wednesday. Home improvement retailers, such as Home Depot and Lowe's, also saw their stock prices dip by over 3%.

CEO of John Burns Real Estate Consulting said, "The builder stocks are highly sensitive to mortgage rates and mortgage rate expectations. Inflation expectations are higher now, which impacts long-term rates."

This is a clear indication that, while higher mortgage rates may deter some potential buyers, they have an even more immediate impact on homebuilders' bottom lines. Builders rely on demand for new homes, which can be undermined by rising borrowing costs. The fact that inflation expectations are now higher only compounds this issue. If rates continue to climb, we could see even more volatility in the housing sector, as builders and investors adjust to a potentially less favorable market.

Trump's victory hasn't directly changed the housing landscape, since his campaign didn't offer specific proposals targeting the sector. However, he did mention deregulation and opening up federal lands for new home construction, which could, in theory, help boost supply. In a market where inventory is already low, anything that can increase housing supply should be welcomed. But whether these policy changes will offset the higher mortgage rates is still unclear.

The National Association of Home Builders (NAHB) issued a statement congratulating Trump, with chairman Carl Harris emphasizing the importance of collaboration to address the nation's housing challenges: "NAHB looks forward to working with the incoming Trump administration and leaders in Congress from both parties to enact a pro-housing legislative and regulatory agenda that increases the nation's housing supply and eases the nation's affordability woes."

This sentiment sounds promising, but there's a huge gap between policy discussions and actionable change. While a pro-housing agenda may eventually help, we're still in the early stages of this administration, and it's hard to predict how much impact these policies will have in the short term. The current challenges—rising mortgage rates, inflation concerns, and home price increases—might make things worse before they get better.

In the meantime, homebuilders are trying to soften the blow for buyers by buying down mortgage rates, but this strategy isn't without its downsides. It cuts into their profit margins, and with inflation and rising costs across the board, this could become unsustainable if rates continue their upward trend.

Mortgage rates were as low as 6.11% in early September but have been climbing steadily since then. While the Federal Reserve's recent rate cut doesn't directly affect mortgage rates, it influences overall market sentiment and expectations about the economy. Stronger-than-expected economic reports over the past couple of months have led to an uptick in bond yields, which directly affects mortgage rates.

For potential buyers, this increase in mortgage rates is already having a real impact. Take, for example, someone buying a $400,000 home with a 20% downpayment. In early September, their monthly payment for a 30-year fixed mortgage would have been $1,941. Today, with rates at 7.13%, that same buyer's monthly payment would rise to $2,157, and increase of $216 per month. This added cost is not insignificant, particularly in a market where many buyers are already stretched thin due to high home prices.

Despite the increasing rates, housing sales have actually seen a surprising uptick this fall. According to the National Association of Realtors, pending sales—contracts signed in September—rose by 7% compared to August. This surge occurred before rates spiked significantly, and it suggests that there may still be demand in the market, particularly as more inventory becomes available. However, it's worth asking whether this trend can continue as mortgage rates climb higher and affordability becomes even more of a challenge for buyers.

One key factor driving this increase in sales is the rise in inventory. There were 29.2% more homes for sale in October compared to the same time last year, reaching the highest level of active listings since December 2019, according to Realtor.com. While more inventory may help balance out the market, the risk is that higher rates could eventually cool buyer demand, even with more homes available.

"The path ahead is anyone's guess and will ultimately be determined by inflation, the economy, and Treasury issuance," Graham added.

In my opinion, the housing market's future is far from certain. While the increase in inventory is a positive sign, the rising cost of financing could become a major hurdle for many buyers. If mortgage rates continue to climb, we could see a significant slowdown in both home sales and new construction, especially if inflation remains stubbornly high. The market could be in for a period of adjustment as buyers, builders, and investors navigate these new realities. Only time will tell if Trump's pro-housing policies can provide the necessary boost, of it we'll face a period of stagnation fueled by rising rates and ongoing affordability issues.