“We should ban rich people from going to McDonald’s to bring down McDonald’s prices.” 😊
George Gammon said that in jest in response to Mr. Trump’s ban on institutional investors from buying single-family homes. More on that below.
In recent days, numerous Trump administration officials (Bessent, Lutnick, etc.) and other macro-observers (including the “All-In” podcast hosts) predicted 5% to 6% GDP growth this year.
As I mentioned in this blog – What Happens If The Economy Grows At A 10%+ Rate – Like Elon Predicts? – our economy rarely ever grows at a 4%+ pace, let alone 5% to 6%!
And – if the economy ever does grow that fast, rates will be far higher – like we saw in the 1980s when the economy was growing very fast and rates were in the double digits.
This is because the bond market (that sets interest rates) focuses primarily on two things: growth and inflation expectations.
So, if that is true, what can Mr. Trump do, if anything, to still bring down interest rates?
In addition, what can he do to bring down home prices if the economy is running hot and/or if rates are coming down?
- More Quantitative Easing (QE) or Buying Up Mortgage Bonds (MBS). Mr. Trump announced MBS QE last week, and rates fell on Friday in response. This is my blog about it: Trump Pushes Mortgage Rates Way Down (QE, Here We Come!). Mr. Trump could push for even more MBS QE.
- Bring Back Prepayment Penalties! One of the reasons mortgage rates are so much higher than 10 Year Treasury yields is because mortgages or MBS come with the risk of early pay-offs (from refinances); investors demand higher yields to compensate for this uncertainty/hassle. Investor Bill Ackman recently reminded us on X that a mortgage rate with a prepayment penalty would be as much as 0.65% LOWER than a mortgage without a prepayment penalty.Prepayment penalties for “qualified mortgages” (most mortgages) went by the wayside with Dodd-Frank, after the 2008 mortgage crisis – but Mr. Trump might lobby to bring them back.
- Encouraging commercial banks to buy more mortgages or MBS. The demand for mortgages by banks relative to Treasuries has been down in recent years, pushing the spread between mortgages and Treasuries higher. This is partially because banks have been finding other lending opportunities with higher yields.But, per Chris Whalen, banks are now finding too much risk in those other areas, and the Trump administration is very likely pushing banks to buy more mortgages as well. So, we could likely see MBS vs. 10 Year spreads tighten further.
- Lowering Fannie’s G-Fee. Fannie and Freddie charge “guarantee fees” of about 70 basis points (0.7%) to “guarantee” the performance of mortgages underwritten to Fannie/Freddie standards. This fee used to be as low as 0.25%. If Mr. Trump pushes Fannie and Freddie to lower the fee back to the olden days fee of 0.25% (something I would not be surprised to see), mortgage rates could fall by another 1/8% or more.
- Lowering inflation. Presidents can do very little to lower inflation other than deregulate, as I have mentioned in previous blogs, but there are two things that will likely portend cooler inflation reads which will bring down rates. Thing #1 is falling rents, because of mass deportations and an oversupply of apartments (and because of how much influence rents have on inflation readings).And thing #2 is falling oil prices, which will work their way into everything – and oil prices have been plummeting. This factor could really help rates, even if the economy does boom.
- No Institutional Homebuying. Mr. Trump recently banned large institutional investors from buying single-family homes – which pretty much does nothing (except impress a few potential voters 😊). This is because institutional investors only own 3% to 4% of housing stock (mom and pop own almost all rentals); institutional investors primarily buy new homes; they are concentrated in already soft markets; and they are not as active in the markets right now as they were.In addition, “banning” anything rarely works as expected, and that is why George Gammon made his McDonald’s joke, referenced at the top of this blog.
- Deregulation/Lower Fees – to make building cheaper. If the masses had any idea of how much local and Federal regulations, zoning laws, and local fees impacted home prices, they would revolt. Mr. Trump can try to influence Federal regulations, but there is not much he can do at the local level other than shine a light on the fees and restrictions. And – even if he is successful, the effects won’t be felt this year.
Long story short: It’s an election year, so I expect Mr. Trump to pull out all of the stops. Some will be for optics, and some might actually work in the near term.
