Following Up On Post-Election Interest Rate Direction

November 4, 2024
  • The Iowa Poll Results Suggest The Polymarkets Are Way Off
  • Election Outcome Probably Had A Big Impact On The Direction Of Mortgage Rates
  • Betting Markets Still Seem Dicey On Political Topics

I got a ton of feedback on last Friday’s post: Why Are Mortgage Rates Rising Since The Fed Rate Cut? Blame Offshore Crypto Trading. Since Tuesday is election day, it is the only thing most participants in the real estate industry are thinking about at the moment, I thought I would explore rising rates further. If that’s an exaggeration, I can say that’s all I am thinking about today and I already voted about a week ago. I got some very insightful feedback from my readers and some of their responses are shared below.

About a week ago I read an article about the weirdness of the bond market after the Fed’s 50 basis point cut in mid-September. It was former PIMCO leader and current Bloomberg Opinion writer Mohamed El-Erian who penned Bond Market Responds Oddly to the Fed’s Move (sorry I have no gift link for this). I follow the housing market closely and am out of my depth when it comes to nuances of the financial markets so I rely on other experts to talk to me about bonds and other things like interest rate direction. El-Erian suggests the following are the common reasons for rising interest rates but how they are weighted is where most disagree:

  • The economy is a lot stronger than most realize – just look at unemployment and wages
  • The betting markets pivoted sharply to Trump in the past month raising the risk of an economic policy based on tariffs
  • The Fed seemed to be backtracking on their past statements
  • Less interest (no pun intended) from foreign investors in buying our financial paper

I went with the second reason since the offshore betting markets moved so sharply in the past thirty days to Trump despite all the polling suggesting it was a statistical tie. Of course, I realize that polls can be problematic. Surveys can be problematic, too. While I don’t bet in predictive markets myself, I do play with a site called Manifold where I don’t have to bet actual money. I did OK pretend betting on March Madness and The Tour de France. I guessed wrong on whether Congress would ban TikTok in 2024 (although the year isn’t over yet).

When I was in high school in Bethesda, Maryland, our next-door neighbor was the president of Gamblers Anonymous (GA) and he always referred to gambling as a disease. Admittedly in college, I bought a $1 lottery ticket checking out each week at the grocery store and netted $200 in a year which I used to fill the gas tank for my car that averaged 8 miles per gallon. I’m not claiming GA is the reason I don’t bet, but sports betting always made me worry about becoming obsessed with it as well as the entire population. Think DraftKings and the NFL these days. This relationship seems kind of scary, opening to a significant societal problem in a decade.

On Saturday, one of the most respected polling outlets in the nation that only covers Iowa with an enviable track record since 2016 showed a significant flip in lead for President. As noted in the reader feedback below, my writing here will now be deemed partisan for mentioning the Iowa poll, when I am only exploring the odds of declining mortgage rates after the election. Reminder: This platform is named “Housing Notes” for a reason!

Final Thoughts

The presidential election is upon us. It’s not clear whether the Fed will stick to its guns and cut rates but so far it sounds like they will. But it is unclear what mortgage rates will do.

To double down on Friday’s post, if the Iowa poll ends up accurately predicting the outcome for the state, the odds seem better for lower mortgage rates in the near term. There’s so much gaming going on behind the scenes and so much tribalism that no comfort can be reached on the outcome of the election until all the votes are counted.

A reminder: Three data points make a trend.

And I’ll be glad to move on from this topic.

It’s harder for some than others to set their clocks back. And when you do, this is an important concept.

Monday Mailboxes, Etc. – Sharing reader feedback on Housing Notes.

November 1, 2024, Why Are Mortgage Rates Rising Since The Fed Rate Cut? Blame Offshore Crypto Trading.

  • I see in your most recent letter a discussion on Tariffs. It is consistent with Democrat talking points, but here are facts from the Tax Foundation (they are probably conservative, but usually data is correct), BLS & BEA:
  • Trump imposed $80 billion of tariffs in his last term. Inflation ranged from 1.8% to 2.4% pre-pandemic, and 1.2% during pandemic. He did this to keep our economic enemies at bay through carefully targeted tariffs. They were not a barrage of tariffs. At same time, unemployment dropped from 4,1% in 2017 to 3.7% in 2019. Further, with jobs protected, minority unemployment rates dropped to record low levels.
  • Biden maintained most of Trump tariffs, and recently added $18 billion more on Chinese goods. We know that Biden mismanaged economy by reducing energy production and causing the inflation spike. However, tariffs were not the culprit. 
  • Trump has said he will continue to impose tariffs and control trade for two reasons. Obviously to protect jobs here, but also to economically strangle adversaries like Iran. If tariffs are issued broadly, there could be inflationary impacts. If he uses them judiciously as he did in the past (and Biden has followed), I don’t see the inflation risk as significant. 
  • We are not sure of Harris’s policies, but she has come out loud against tariffs and if elected, will likely reduce them. This will cause job losses here possibly coupled with deflation. The only cure will be massive spending to put money into consumer’s pockets. We would likely avoid a recession like we have the past two years, but debt will be huge. Interest payments on the debt will eventually strangle the economy. If debt continues to increase at current rate, interest rates cannot remain low. Even if Trump is elected, there is so much spending overhang that he will be dealing with trillions in new debt his first year in office. The debt issue will have a huge negative impact on housing in coming years unless there is a major effort on the debt front.

November 1, 2024, Why Are Mortgage Rates Rising Since The Fed Rate Cut? Blame Offshore Crypto Trading.

  • To blame rising rates on an offshore bogeyman gives you an opportunity to bash Trump, and I understand that’s tough to resist.  But the problems may be simpler: the structural economy is not good.  There is a disproportionate involvement of government in economic activities, and growth is not coming from the private sector, it’s coming from government jobs and government spending.  The reporting on jobs, CPI, and inflation YOY comparisons are reported favorably and then corrected and re-issued with downward revisions – – just look at the BLS and their downward revision of 818,000 jobs.  Further, today’s report on job growth is another harbinger of a possible economic downturn next year.  
  • You also tout the economy remaining strong in the context of employment and wages, but not looking at other fundamentals like the employment participation rate (still below pre-covid levels and steadily declining since 2010) and wages that are failing to keep up with the pace of inflation.  How come no one ever mentions that the labor participation rate is only 62%?  I think as two white, well-educated men with suburban homes, it’s easy to be disconnected from what’s happening in the rest of the country.
  • Is it possible that the banks are simply raising rates in anticipation of some potential recessionary conditions in the next year or two?  Just a thought.

November 1, 2024, Why Are Mortgage Rates Rising Since The Fed Rate Cut? Blame Offshore Crypto Trading.

  • First off thank you and kudos for some terrific and useful insight always. 
  • As a former bond salesman, I imagine that POLYMARKET is easy to manipulate. I was interested in the details you/BR provided. 
  • On rigging the UST market, I suggest you are underestimating its depth and size. $500 billion of dollars a day trade in the on-the-run issues. A couple colluding participants cannot move markets effectively, not even large hedge funds. Maybe supply/demand, election banter leading to concern about continuing deficit spending–who knows why the 10/30 years have retraced 50+ bps so quickly. 
  • Remember the expression “you may be right, but the market has more money than you”? 

Did you miss Friday’s Housing Notes?

November 1, 2024

Why Are Mortgage Rates Rising Since The Fed Rate Cut? Blame Offshore Crypto Trading.

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