How the 2020 Election Could Impact Mortgage Rates

The 2020 election cycle has been one of the most turbulent in recent memory. No matter what happens in early November will be a year long remembered. Regardless of the outcome, many factors could change, including mortgage rates.

At San Diego Purchase Loans, we take a particular focus on interest rates, as these have a large impact on our industry, as well as how we can serve our customers. Many people are wondering how this election could impact interest rates, and while the future is impossible to predict (2020 has certainly proven that!), we look at past interest rates and try to make a fair guess.

Mortgage Rates and the Federal Reserve

To understand the government’s relationship with interest rates, we need to turn our attention to the Federal Reserve. The Federal Reserve, which is the central banking system in the United States, sets the base-line interest rates across the country. Essentially, the “Fed” sets the interest rate at which banks can lend to each other. This becomes the baseline, and it’s the foundation at which lenders can make loans to consumers. So if the Federal Reserve sets interest rates lower, banks and lending organizations can in turn set interest rates at a lower level as well, all while enjoying a profit.

What Have Rates Done in the Past?

There are countless ways we could try to analyze the historic impact of an election. We could look at months leading up to the election, the months between the election and inauguration, and the months or years following an election.

But we’ll try to keep things simple. We’ll simply look at the average 30-year mortgage rates according to Freddie Mac for an election year (2016, 2008, 2004, etc) and compare these numbers to the average interest rates of the following year. This is not a perfect system, but it at least gives us a consistent look at interest rates.

Here are the numbers…

Year

Interest Rate (%)

Change

2017

3.99

+0.31

2016

3.68

_____________

2013

3.98

+0.32

2012

3.66

_____________

2009

5.04

-0.99

2008

6.03

_____________

2005

5.87

+0.03

2004

5.84

_____________

2001

6.97

-1.08

2000

8.05

_____________

1997

7.6

-0.21

1996

7.81

_____________

1993

7.31

-1.08

1992

8.39

_____________

1989

10.32

-0.02

1988

10.34

_____________

1985

12.43

-1.54

1984

13.88

_____________

1981

16.63

+2.89

1980

13.74

_____________

1977

8.85

-0.02

1976

8.87

_____________

1973

8.04

+0.66

1972

7.38

As you can see from the numbers above, there is a wild fluctuation in interest rate changes from an election year to the following year. The largest increase was between 1980 and 1981, when Ronald Reagan defeated sitting president Jimmy Carter. There was a 2.89% increase, which was the largest change (positive or negative) we found. The largest decrease was four years later, when Reagan retained the office by defeating Walter Mondale, who was Jimmy Carter’s Vice President. In this cycle, we see a decrease of 1.54%. (Apparently the Eighties were as wild as remembered!)

Over 12 cycles, we see an average change of -0.06 in interest rates; that’s hardly a number that mathematicians would call “statistically significant.” Yes, there can be large changes; changes well above or below a single interest percentage point. But six out of the twelve cycles showed a change less than 0.5%, either positively or negatively. And three cycles showed changes less than 0.1%. It seems that, at least historically speaking, the elections have little impact on interest rates. Other factors, which can be influenced by elections (housing demand, market activity, etc.) likely have a more important impact.

We can, however, look at past elections that are similar to the current situation, with a sitting President seeking to stay in the office, as opposed to two new candidates seeking to become President.

Reelection of Sitting President

In 2012, Pres. Obama won reelection and mortgage rates only went up 0.32% the next year. In 2004, George W. Bush won a second term and interest rates ticked up 0.03%. After Pres. Clinton’s reelection in 1996, interest rates declined by 0.21%. All small changes; the only large change appears to come after the reelection of Pres. Reagan in 1984 with a -1.54% change. It seems likely, according to history, that if Pres. Trump wins reelection, interest rates would stay similar.

Challenger Wins Election

In our data, we only see two elections where the sitting President was defeated. In 1992, George H.W. Bush was defeated by Clinton; afterwards interest rates were reduced by 1.08%. In 1981, after Carter was beat by Reagan, mortgage rates rose 2.89%. So it seems possible that if Vice President Joe Biden is elected, interest rates could swing in one direction. Because interest rates are so low, if they change at all it will likely be upward.

The Fed’s Relationship with the Executive Branch

The Federal Reserve is an important institution for setting the baseline for interest rates.

Compared to other agencies of the Unites States government, the U.S. Federal Reserve operates with a high degree of independence from the executive branch. However, it is not completely immune to the influence of elected representatives, including House Representatives, Senators, and the President. The seven members who make the Federal Reserve Board are appointed by the U.S. President, then become confirmed by the United State Senate. They operate on 14-year terms, so each president has the chance to appoint at least two new members in a single term. (Two-term presidents will appoint at least four.) Once appointed, the chairperson cannot be removed by the president.

So while the Federal Reserve Board is not beholden to the Executive or Legislative Branch, they are often influenced by politicians. Most recently, Pres. Trump pressured the Federal Reserve to maintain low rates during a strong economy and even them further, which flew against conventional wisdom. (Conventional wisdom says lower interest rates when economy is slow to encourage economic activity, raise them when economy is strong to avoid a bubble.) The Feds did maintain rates at a relatively low percentage, but whether they chose to do so because of the President is not really known; they may have taken the same actions without the nudge from Pres. Trump.

This is important to note. No matter who gets elected, no matter which party controls the Executive or the Legislative, they cannot change interest rates or mortgage rates. Yes, they can nominate and confirm board members whom they hope will do as they want, but interest rates are not within the jurisdiction of these elected officials.

Helping You Find a Mortgage with the Best Interest Rate

No matter what happens in November, our team will be here to provide the service and support you deserve. We’ll help you choose the right mortgage, and help to find the lowest possible interest rate so you have a house payment that you can afford!

CONTACT SAN DIEGO PURCHASE LOANS TODAY!

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I hope you enjoyed reading this article. It's my goal to keep you updated with the latest real estate mortgage news. I'm proud to provide you with 100% original and unique content. Subscribe now to get high quality real estate mortgage content and articles delivered directly to your inbox. Chad Baker is Regional Manager for Cross Country Mortgage. Chad is consistently recognized in the top 1% of mortgage originators in the United States 2011-2019. Got a question for Chad? Call (858) 353-8331 or submit your question online