Privatizing Fannie Mae would cause mortgage rates to soar, economist says

Economists offer a mixed-bag take on how the housing and mortgage markets will react under Trump's second presidency

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | December 9, 2024

Article originally posted in Orange County Register on December 5, 2024

What will the future look like for real estate and mortgages under President-elect Trump?

This week, I asked several economists to weigh in.

Mark Zandi, chief economist at Moody’s Analytics, sees a cloudy crystal ball under Trump. He describes the nation’s incoming president as hard to gauge because he’s “chaotic and opaque.” That said, Zandi had mostly negative takeaways. For example, he predicts higher deficits and higher inflation.

First and foremost is the potential for privatization of Fannie Mae and Freddie Mac.

“Privatization will be a whole another kettle of fish. Seventy-five percent of all mortgages have a government guarantee,” Zandi said. “Without an implicit or explicit (government) guarantee, there will be less credit availability and higher rates.”

Zandi thinks the numbers will flip if the two agencies privatize, resulting in 75% of mortgages being private and 25% under government guarantees. Federal Housing Administration and Department of Veterans Affairs mortgages will remain under government guarantee.

Zandi told me that Trump is not a fan of government subsidies for housing. On the radar is an increase in FHA mortgage insurance premiums. This will raise revenue for other priorities.

As far as mortgage rates go, under a Trump presidency, Zandi sees the 30-year fixed closer to 7%, instead of the 5% range.

As it concerns deportations, 30% of construction labor are immigrants.

“Immigrants are important to construction,” Zandi said, affirming what others in the industry have said. And while that hurts building trades, he said it might help rentals as the share of (available) rentals will rise.

“Less supply of workers means less demand for rentals,” he said.

One positive Zandi sees for high-wealth individuals and companies is the corporate tax rate, which he expects may drop to 15% from 21%. He also sees fewer regulations under Trump.

Jordan Levine, chief economist at the California Association of Realtors, thinks potential lower tax rates will mean more money in people’s pockets. “(There) is gaining momentum in Congress to double the capital gains’ exclusion,” he said.

If Levine is right, a married couple would be able to exclude $1 million in capital gains or a single person would be able to exclude $500,000. I think this could set housing sales on fire.

Levine sees the volume of California home sales rising 10% next year, with the median pricing rising 5%. He believes mortgage rates will end up in the high 5% range by the end of 2025.

Raymond Sfeir, director of economic research at Chapman University, sees some pluses and some minuses under Trump as it concerns all matters of housing. Trump has made different statements directly and indirectly, according to Sfeir.

“Trump said he’ll push mortgage interest rates down. Pushing rates down can push prices up,” Sfeir said. “He can’t as president push mortgage rates down. And the Federal Reserve (chair Jerome Powell) doesn’t have to listen to him (regarding short-term rates). “He gets excited, but he doesn’t understand these things.”

Would building homes on federal land — something Trump has proposed — be effective? In a word, no. Sfeir points out that most federal land is in rural areas. “We really need it in urban density areas,” he said.

Regarding decreasing regulations, Sfeir said this could help in regard to federal regulations, but Trump can’t remove state and local regulations.

And what about tariffs and deportations?

“Tariffs will indirectly affect home building, making construction costs higher,” Sfeir said.

“Regarding the deportation of immigrant construction workers, Trump insists it will cut costs,” he said. “Instead of helping to cut costs, wages will go up, costs will go up and there will be delays in construction because there are not enough workers. Home improvement costs will go up as well.”

Christopher Thornberg, founding partner, Beacon Economics, told me that a lack of attention to the federal deficit is a bad thing. “Right now, the debt is 120% of the GDP. Ignoring the federal deficit means rates go up.”

As an aside, Thornberg believes we are in a financial bubble in respect to the stock market and cryptocurrency. Obviously, if, and when the bubble pops, Trump is going to have to deal with it.

Moussa Diop, associate professor at the USC Lusk Center for Real Estate, spoke about the need to address the affordable housing problem.

 “We are 4 million units short in the US,” Diop said. “I don’t think we’ll be able to address (solve) affordable housing in the next four years. It will take 10 years to add.”

Diop is very optimistic about mortgage rates, seeing them below 5% by the end of 2025.

From Anil Puri, director of the College of Business and Economics at Cal-State Fullerton, wrote via email:

“Even though President-elect Trump has not articulated a clear vision for housing, we can discern from his other proposed actions the likely impact on housing. Given the possibility of large-scale tariffs and tax cuts, interest rates could stay higher than what was expected a month ago. Deregulation could help housing construction, although it is not an explicit goal stated so far.

“So, it will be a mixed bag, and housing and real estate will move with the general trends in the economy, which so far are positive.”

My crystal ball predictions for next year under the Trump presidency will be published in two weeks.

Freddie Mac rate news: The 30-year fixed rate averaged 6.69%, 12 basis points lower than last week. The 15-year fixed rate averaged 5.96%, 14 basis points lower than last week.

The Mortgage Bankers Association reported a 2.8% mortgage application increase compared with one week ago.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $806,500 loan, last year’s payment was $183 more than this week’s payment of $5,199.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.625%, a 15-year conventional at 5.5%, a 30-year conventional at 6.25%, a 15-year conventional high balance at 5.99% ($806,501 to $1,209,750 in LA and OC and $806,501 to $1,077,550 in San Diego), a 30-year high-balance conventional at 6.5% and a jumbo 30-year fixed at 6.375%.

Eye-catcher loan program of the week: A 30-year mortgage, with 30% down, locked for the first 5 years at 5.875% with 1 point cost

Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.