After being on a downward trend, falling from 7.22% in May to 6.09% in mid-September, the 30-year mortgage rate reversed course, rising sharply to 6.79% in early November. This discouraged home buyers from jumping back into the market.
The average 30-year mortgage rate has remained above 6% for two years and is expected to stay above that level for the foreseeable future, according to experts, as quoted on NBC News.
Why Mortgage Rates Aren't Budging Despite Fed Cuts
A decline in the Federal funds rate, typically has an indirect impact on the mortgage rates, resulting in the mortgages rates to decline. However, even after the recent rate cuts by the Fed, the 30-year mortgage rate not just failed to decrease but actually surged.
Uncertainty regarding the Fed’s future move and rising market expectations that it may not adopt an aggressive approach, does not help the mortgage rates. According to The New York Times, President Trump's proposed tax cuts and increase in tariffs may put an upward pressure on prices, with Wall Street analysts projecting that Trump’s campaign promises could lead to interest rates remaining slightly higher than previously forecasted.
However, some economists hold a slightly more optimistic view, anticipating that mortgage rates will decrease in the near future as uncertainties surrounding the U.S. Presidential election have eased.
Government Bond Demand and Mortgage Rates
The fluctuations in mortgage rates are more closely linked to the demand for government bonds. A mix of stronger-than-expected growth and uncertainty over President Trump's economic proposals, igniting the likelihood of rising inflation and a growing deficit, is keeping the 30-year mortgage rate elevated, despite of the Fed cutting interest rates.
When demand for government bonds rises, mortgage rates typically decline. Driven by strong economic growth in the post-pandemic era, the demand for government bonds has reduced. At the same time, concerns over the growing budget deficit and the potential need for the U.S. government to issue more debt have dampened investor appetite for government bonds, according to NBC News.
What Will a Trump Presidency Mean for the Housing Market?
President Trump plans to address housing affordability in the United States by encouraging the construction of new homes. According to CNBC, while increasing home construction is a straightforward solution to the housing crisis, experts warn that other economic proposals made by Trump could undermine efforts to improve affordability.
Along with the potential for increased inflation and a higher government deficit, mass deportation of immigrants in the United States, as talked about by President Trump, could drive up building costs, as the construction industry relies heavily on immigrant labor, according to LendingTree senior economist Jacob Channel, as quoted on CNBC.
During his 2024 election campaign, Trump advocated for reducing regulations and permit requirements, which can contribute to higher housing costs for homebuyers, with the aim of lowering the overall cost of new homes.
ETFs to Consider
Below, we have highlighted a few funds for investors to consider amid growing uncertainty in the U.S. housing market, fueled by rising inflation bets and the prospect of elevated rates for a longer period, which put significant pressure on housing affordability. Experts expect housing market activity to remain subdued for much of 2025.
Given the growing uncertainty, investors with a short- to medium-term outlook may want to consider reducing their exposure to these funds.
iShares U.S. Home Construction ETF ( ITB )
iShares U.S. Home Construction ETF charges an annual fee of 0.39% and has Zacks ETF Rank #3 (Hold), with a High risk outlook. The fund has lost 7.84% over the past month and 2.79% over the past three months.
SPDR S&P Homebuilders ETF ( XHB )
SPDR S&P Homebuilders ETF charges an annual fee of 0.35% and has Zacks ETF Rank #3, with a High risk outlook. The fund has lost 8.29% over the past month and 3.24% over the past three months.
Invesco Building & Construction ETF ( PKB )
Invesco Building & Construction ETF charges an annual fee of 0.62% and has Zacks ETF Rank #3, with a High risk outlook. The fund has lost 2.43% over the past month but has gained 1.68% over the past three months.
Hoya Capital Housing ETF ( HOMZ )
Hoya Capital Housing ETF charges an annual fee of 0.30% and has Zacks ETF Rank #3. The fund has lost 6.02% over the past month but has gained 1.08% over the past three months.
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SPDR S&P Homebuilders ETF (XHB): ETF Research Reports
iShares U.S. Home Construction ETF (ITB): ETF Research Reports
Invesco Building & Construction ETF (PKB): ETF Research Reports
Hoya Capital Housing ETF (HOMZ): ETF Research Reports
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