We recently had a client who urgently wanted to refi “before Biden gets elected and causes rates to shoot way up.”
She was convinced Biden would immediately improve the economy so much that rates would increase sharply as a result.
I hear comments like that so often that I wanted to address the topic again – even though I hit it as recently as July.
RATES IN ELECTION YEARS
As I remind everyone often, it is a myth that rates go down in election years. There is actually about a 50/50 chance.
As an interesting aside, in my January blog discussing this, I predicted rates would go up in 2020 b/c the economy was so strong (before COVID was even on the horizon).
Anyway, b/c rates do not always go down in election years, it is safe to assume they don’t always go up after elections.
WHAT MAKES RATES OVERALL GO UP?
There are numerous factors that can push rates up, including:
- Strong economic signals such as growing GDP, increased consumer spending, or an improving labor market. After Trump was elected in 2016, rates increased almost 1/2 percent b/c investors apparently thought that Trump’s potential tax cuts and deregulation would be good for the economy. If Biden is elected, tax increases and increased regulatory burdens seem more likely, which could dampen the economy. But, he is also more likely to support more aggressive stimulus packages, which can aid economic growth. This is something we have witnessed over the last six months, as the massive stimulus/relief packages seem to have kept the economy much stronger than expected despite COVID. Another plus from an economic growth perspective is the possibility that COVID-19 coverage will be more positive from the media sources that seem to lean in Mr. Biden’s direction (since many mainstream media sources tend to lean in Biden’s favor and thus tend to report COVID issues more negatively to make Trump look bad). This might make many politicians and voters more willing to open up the entire economy. So who has the edge here? No clue, but I would have to say that a Trump victory is slightly more likely to push rates up based on what happened in 2016.
- Inflation signals. The Fed is employing “quantitative easing” and all kinds of other stimulus programs like never before in American history. This will necessarily continue no matter who is elected. According to many pundits (investment bankers who have skin in the game) I listen to in the podcast-sphere, with the money supply increasing at all-time record rates, inflation is all but inevitable at some point. So who has the edge? It is a toss-up.
- Increased regulatory costs and fees. I have blogged a few times about how we had to “beat up” a professional baseball player for all kinds of inane conditions even though he made $4 million per year and had millions in the bank. The reason of course was regulations, and unfortunately, haranguing borrowers for conditions that likely have no bearing on credit quality, is something every lender has to do all the time. Many regulations are necessary of course, but they often overreach and they definitely add to the cost of every loan (b/c of all the labor and tech they require).During the Obama years, the regulatory agencies were much more active than they are now. So who has the edge? I think a Biden victory is more likely to increase regulatory costs and thus push rates up a bit.
- Excessive demand for mortgages. This is a factor that we don’t often see play out unless demand for mortgages really surges like we have seen over the last six months with the massive rate reductions and resulting refi boom. This too will likely continue, irrespective of who is elected, until very strong economic growth numbers or inflation signals push rates up enough to make refis unattractive. So who has the edge? Toss-up again.
SO WHO IS BETTER FOR RATES?
Based on all of the above factors, I might think Biden is slightly better for rates. This is again based on the shocking rate increase (that NOBODY saw coming) after the 2016 election.
BUT – there are so many variables and unknowns – nobody really has any idea – as always.
And that is the main point of this blog. Beware of experts with certitude.
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