Here you can see where mortgage rates will go next year

With the Federal Reserve Board set to cut interest rates next week, it feels like everyone is breathing a sigh of relief that interest rates are finally coming down again.

But life is a balance problem, and so is interest rates. Given the changes in the federal funds rate, the next big question is: where are mortgage rates going?

Mortgage rates and the Federal Funds Rate

The federal funds rate is the interest rate at which banks lend money to each other, not the interest rate at which they lend money to consumers. Generally speaking, interest rates on credit cards and mortgages are always higher than the federal funds rate because banks need to make money to keep operating.

But even though mortgage rates are not directly affected by the federal funds rate, they do tend to move together, albeit not with a constant gap between them. When the federal funds rate goes down, mortgage rates go down too—that's basically a given.

The main indicators for changing the federal funds rate include the unemployment rate and inflation. The Fed uses the federal funds rate to influence both factors. Overall, the long-term inflation target is on average around 2%, but unemployment is a softer target – it should simply be as low as possible given the economic conditions.

Where mortgage rates will go in 2025

With unemployment at 4.2% in August 2024, one of the lowest levels in history, and inflation at 2.5% for the twelve months to August 2024 (up from 2.9% in the previous month) and 3.2% for the year to July 2024, it would be easy to say that there is no way mortgage rates could rise from now on.

But the truth is much worse. In fact, it may be the worst nightmare for most mortgage lenders.

Since it's an election year, mortgage rates depend on who wins the election. On September 12, 2024, that's anyone's guess. A variety of polls show Harris and Trump almost neck and neck.

And while a million different factors can affect unemployment and inflation, administration policy is a major factor. Most candidates promise far more than they can possibly deliver, since they have to work with Congress to get anything passed. But there are a few issues that economists have already identified as problematic for the federal funds rate in the long term.

This is a very brief summary of the factors to consider.

Harris

While many of Harris' policies are likely carried over from the Biden administration, she has realistically proposed some measures that could drive up inflation. The first-time homebuyer tax credit, if widely adopted and implemented at the wrong time, could further drive up home prices as more buyers once again compete for limited housing.

Before these measures come into force, other measures to promote development and provide more housing must first be implemented, otherwise further inflation in the housing market is to be expected.

Harris's proposed enhanced child tax credit, which will be a boon to parents, can also be a curse for inflation. More money can mean more spending, and often more spending means more jobs, which is great – but sometimes it just leads to more inflation as companies try to pocket more of that money for every item they make.

However, these are relatively minor influences that can be easily compensated for.

Trump

Trump's overall policy approach is inflationary, from his proposed import tariffs to his aggressive deportations. High tariffs, he claims, are not paid for by the country on which they are imposed. They are paid for by us, in the form of higher costs for goods.

If he suddenly increases the cost of goods made in China by 60 percent, it is not China that pays that amount, but we. And that contributes directly to inflation – according to Goldman Sachs, up to 1/10 percent for every percent increase in tariffs.

Another factor is the threat of mass deportations. I think it's no secret that much of the agricultural and construction work is done by immigrants with questionable immigration status. Because of that status, these people often do this work for wages that are well below market levels.

Deporting 8.3 million illegal immigrants working in low-wage jobs will have a similar impact to what happened in 2020 when we started losing workers to Covid-19. Wages shot up overnight, and with them inflation because it cost much more to hire workers from a much smaller pool, which in turn drove up the cost of doing business.

In addition, certain industries would be decimated. According to Pew Research, 14% of agricultural workers were undocumented in 2020, as were 12% of construction workers, 8% of hospitality workers, and 6% of manufacturing workers.

You think food and housing are expensive today? Wait until a whole bunch of workers in those industries disappear.

Future mortgage interest rates are unpredictable

It's impossible to predict how interest rates will move until we know who the next president will be. Current indicators point to lower mortgage rates under Harris and higher mortgage rates under Trump. This is not bias; it is based on facts that are publicly available and can be verified by anyone.

You can have your say on how interest rates will evolve in 2025 at the ballot box on Election Day. I hope to see you there.