Leave it to Donald Trump to shake up things. As the ultimate disrupter of the American political scene, Trump’s presidential win is already upending the real estate and U.S. mortgage market.
Just two days following the presidential election, 30-year fixed-rate mortgages jumped by 0.25%. Re-pricing in the bond market has now pushed yields higher, lifting 30-year fixed rate mortgages to 4.02% from a 52-week low of 3.34%, according to MortgageNewsDaily.com. The market’s expectation is that Trump’s economic plan of spending on infrastructure projects, tax cuts, and financial deregulation will be a boon.
Because bond yields and bond prices are inversely correlated, the recent surge in yields has led to dramatic performance reversals in fixed-income ETFs.
The iShares MBS ETF (MBB) was ahead by more than 20% in mid-July, but has lost much of its yearly gains and is now ahead by just 2.13% year-to-date as of Tuesday’s market close. MBB holds U.S. mortgages backed bonds issued by Ginnie Mae, Fannie Mae, and Freddy Mac. The average weighted maturity of MBB’s bond portfolio is 6.23 years.
While historically low borrowing rates over the past few years have helped keep the recovery in real estate prices alive, obtaining a mortgage loan—even for qualified borrowers—has been difficult. “It doesn’t matter how low rates are if people can’t get access to credit,” says Rick Scaramella, a mortgage consultant in Encinitas, Calif.
He blames burdensome regulation and the enactment of the Dodd-Frank Act in 2010 as the primary culprit for hurting the lending market. Scaramella believes amending or repealing Dodd-Franck will greatly help the mortgage business, and Trump has promised to make big changes along those lines.
Dodd-Frank was introduced during the aftermath of the 2008-09 credit crisis after nearly 8 million homes fell into foreclosure. While the law was designed to prevent a repeat of the loose-lending era, it increased compliance costs for lenders and forced them to verify the ability of borrowers to repay mortgage loans.
The financial services sector has largely shrugged off the reality of higher interest rates.
The Financial Select Sector SPDR ETF (XLF), which holds exposure to large banks such as JPMorgan Chase and Wells Fargo, has surged over 16% year-to-date and is outperforming the broader S&P 500. Around 11% of XLF’s gain occurred after the presidential election on anticipation of a friendlier regulatory environment for banks under a Trump administration.
Meanwhile, ETFs tied directly to the U.S. housing market have moved in the opposite direction, feeling the direct brunt of higher bond yields. The SPDR S&P Homebuilders ETF (XHB) is down 1.48% while the iShares Residential Real Estate Capped ETF (REZ) has lost 3.39% year-to-date. Although the losses are modest, both real estate ETFs were gainers through early September. As with the ETFs tied to mortgage-backed securities, most of the losses in real estate-focused funds have occurred over the past two months.