Expectations of a Trump victory are causing mortgage rates to skyrocket. Top economists say this will most likely result in scorching inflation

“If he is elected, we will increase our Fed Funds forecast by about 50 basis points,” Ryan told me, referring to the interest rate at which banks and other institutions lend money to each other.

The presidential election is less than a week away and the real estate world is still at a standstill. The two candidates have plans or plan concepts for housing construction. But inflation plays a key role. It can drive up prices, even if real estate acts as a hedge against it. The consumer price index rose only 2.4% in September compared to a year ago, very close to the Fed's target. Not to mention, the same month the central bank began a rate-cutting cycle, cutting its key interest rate by 50 basis points. So you might think that the worst is behind us, but that may not be the case.

In June, 16 Nobel laureates signed a letter expressing concern that Trump's proposals could fuel inflation again. Earlier this month, 68% of those said Wall Street Journal said inflation would likely be higher under a Trump presidency. On the other hand, 12% said the same for a Kamala Harris presidency. Hot, hot inflation has gotten us into a mess, so to speak, namely the frozen real estate landscape. Housing prices had already soared during the pandemic, but as inflation hit a four-decade high and pushed the Fed to aggressively raise interest rates, mortgage rates indirectly followed suit: the housing market was paralyzed.

If Harris wins, the most likely scenario would be that the Senate goes Republican; If that happens, “it's the political status quo,” said Mark Zandi, chief economist at Moody's Assets. “Nothing meaningful will change in tax policy, spending policy, or regulatory policy. Therefore, inflation in this status quo will be the same as it is now and in line with the Fed’s objective.”

But if Trump wins and stays in office for another four years, it would most likely be a Republican victory in the House and Senate, Zandi said. That means Trump will get his tax cuts, which Zandi says will be largely funded by deficits. In the event that it is not a search, Trump could still move forward with his customs or immigration proposals based on an executive order. “Inflation will most likely be higher under Trump, regardless of the makeup of the government,” Zandi explained.

Ryan echoed Zandi; Trump's proposed policies are inflationary, again particularly on tariffs, immigration and tax cuts, he said Assets. For example, Trump has imposed a 60% tariff on all Chinese imports and a universal 10% tariff on imports from all countries. And mass deportation of undocumented people is pretty much all his immigration policies are taking away from his labor supply, Ryan said. “That's why there's a lot of talk about his second possible presidency being inflationary,” he explained. Still, Trump's policies could be toned down depending on the state of Congress.

Either way, the two economists agree that consumer prices would be higher under Trump. Well, this suggests that the Fed's first step would be to stop cutting rates. Zandi believes that if Trump wins, the central bank will immediately suspend its interest rate cuts to simply wait and see what happens. It's possible that the Fed would raise rates again if necessary, but it's more likely that it would hold off for a while.

But because economists expect nothing would change if Harris were elected, “the economy you have today is the economy you will have in a year,” Zandi said. According to Ryan, Harris' “proposed measures are not nearly as inflationary,” but she also mentioned deficit-financed spending. Still, he doesn't believe a Harris presidency would force the Fed to change course.

That's not to say everything would be perfect if Harris were president; That won't be the case and housing construction will still be pretty stalled, perhaps there will be a bit of a rebound. Mortgage interest rates could also fall somewhat. However, the expectation of another Trump presidency is already making itself felt and could only get worse if he is elected.

Mortgage rates plummeted in anticipation of the Fed's first and so far only interest rate cut. That is no longer the case. They are back in the black: the last daily value for the average 30-year fixed interest rate was 7.09%. Some of this has to do with the “Trump trade,” Zandi said, “the expectation that he's going to win and that that's going to lead to higher inflation and bigger budget deficits. That's already affecting mortgage rates.”

Ryan also mentioned the “Trump trade.” As the betting odds for him go up, the 10-year Treasury bond goes up, and that's what influences mortgage rates. It's not entirely clear whether the surge will continue if Trump actually wins, as some of it is already priced in – although it could happen. Not to mention, the market will also pay attention to the makeup of Congress, which could cause some volatility.

The higher mortgage rates go, or the longer mortgage rates are higher, the tighter the real estate market will be. Not many people sell because who wants to give up their lower price for a much higher price, not to mention the time when prices are also higher. This and the existing housing shortage make it almost impossible to buy an apartment yourself. Higher mortgage rates or even unchanged interest rates won't help. Unfortunately, if you missed the short window of opportunity before the Fed cuts interest rates, you may not want to commit to it so quickly. Any recovery we see in the real estate world over the next year or two “would be slightly flatter under a Trump presidency,” Ryan explained.

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