As President Donald Trump commenced his second term, his first-day executive orders sparked widespread discussion and speculation about their potential economic effects. Despite some market concerns, particularly regarding tariffs and trade agreements, mortgage rates have remained steady, signaling that these initial policy moves have had minimal impact on the housing and mortgage markets.

Executive Orders and Market Reactions

Inauguration day brought expectations of aggressive trade policies, with traders anticipating executive orders related to tariffs. Historically, tariffs have been linked to higher inflation, which often correlates with increased mortgage rates. However, President Trump’s directives focused more on assessing trade agreements and deficits rather than immediately imposing stringent tariffs. This measured approach provided relief to the bond market, allowing Treasury yields to stabilize and even improve slightly.

Mortgage rates are closely tied to the bond market, particularly the 10-year U.S. Treasury yield. As bonds held onto gains from the previous week, mortgage lenders maintained steady rates. The average top-tier 30-year fixed rate remained unchanged, a testament to the restrained market reaction to the president’s initial actions.

Why Mortgage Rates Are Unaffected

Mortgage rates are influenced by a complex interplay of factors, with Treasury yields playing a pivotal role. Despite the Federal Reserve’s recent rate cuts aimed at controlling inflation, mortgage rates have seen gradual increases. This counterintuitive trend can be attributed to several underlying forces:

1. Wider Mortgage Spreads: Lenders are pricing mortgages at higher premiums over Treasury yields due to market volatility and tightened lending standards. This spread is currently about 2.4 percentage points, significantly above the historical average of 1.7 percentage points.
2. Quantitative Tightening: The Federal Reserve’s reduction of its Treasury bond holdings, combined with reduced foreign demand for U.S. bonds, has contributed to higher Treasury yields, indirectly affecting mortgage rates.
3. Market Conservatism: The banking sector’s cautious stance, exacerbated by recent financial shocks, has made lenders more conservative in underwriting mortgages, further widening the spread.

Housing Affordability Challenges Persist

While mortgage rates remain elevated, housing affordability continues to be a significant challenge. The typical homebuyer faces higher monthly payments due to increased rates and elevated home prices. For instance, a 30-year, $300,000 fixed mortgage at 7% incurs roughly $400 more per month compared to a 5% rate.

Experts predict that mortgage rates will likely stay above 6% until at least 2026, despite the Federal Reserve’s efforts to manage inflation. This creates a challenging environment for prospective homebuyers, who must weigh the trade-offs between current market conditions and their long-term financial goals.

What Homebuyers Should Consider

In this landscape, homebuyers are advised to:

• Evaluate Timing: Assess whether purchasing now aligns with their financial circumstances or if renting temporarily may be a better option.
• Increase Down Payments: A larger down payment can reduce the loan amount and make monthly payments more manageable.
• Explore Adjustable Rate Mortgages (ARMs): ARMs can offer lower initial rates but come with the risk of rate adjustments in the future, making them suitable only for those with flexible budgets.

Independent Home Finance Inc. Is Here to Help

Navigating the complexities of the mortgage market can be daunting, especially in uncertain economic times. At Independent Home Finance Inc., we bring over 25 years of experience to guide clients through their mortgage journey. Whether you’re considering a fixed-rate mortgage, exploring ARMs, or seeking advice on refinancing options, our team is dedicated to helping you make informed decisions tailored to your needs.

Contact us today to learn more about how we can support your homeownership goals and provide clarity in a challenging market.