It’s astonishing how quickly the tides have turned. The betting market chart on the next presidential election has changed dramatically since the assassination attempt. Adding to the weekend’s twist, President Biden stepped down, passing the reins to VP Harris. Recent polls indicate a much tighter race now.

Harris vs. Trump: Implications for Real Estate and Interest Rates

The entry of Harris into the race against Trump raises questions about the future of real estate and interest rates. Which candidate is more favorable for the real estate market? Historical patterns suggest an “October surprise,” meaning there’s still a long way to go before the election is decided.

A Surprising Election Year

No one could have predicted the events of this election year, from an assassination attempt to a sitting president dropping out. According to recent polls, Harris is polling higher than Biden in a matchup against Trump, making the race almost a statistical dead heat. It may take a month or more to get clearer numbers on Harris, and the upcoming presidential debate could again shift the dynamics. Polls will likely fluctuate significantly between now and the election, so stay tuned.

A Common Theme: Increased Deficits

Regardless of which candidate you support, both Harris and Trump have one thing in common: increased deficits. However, their approaches differ. Trump aims to lower revenue through tax cuts while maintaining high spending on social security, Medicare, Medicaid, and other major areas, resulting in a net increase in the deficit despite some spending cuts elsewhere. Harris is expected to follow a Democratic platform, increasing government spending and taxes, leading to higher deficits.

The Impact of Deficit Spending on Interest Rates

Deficit spending influences interest rates. The Federal Reserve doesn’t set long-term interest rates like the 10-year treasury, which drives real estate mortgage rates. As deficits grow, the government must sell more bonds to finance them, increasing bond supply. In economics, an increase in supply leads to a decrease in prices, meaning interest rates must rise or stay high.

Short-Term Interest Rates and the Federal Reserve

Speculation about the next president suggests the Federal Reserve might pause significant changes to interest rates. A 0.25% cut is expected in September, but the Fed is likely to hold steady until after the election unless a major issue arises. This anticipated rate cut is already factored into the treasury market, so significant changes in rates are unlikely unless the labor market encounters severe problems.

Mortgage Rates Outlook for 2024

The expected Fed cut is unlikely to significantly impact real estate in 2024. The market anticipates one or two rate cuts this year, but their effect will be muted. Even assuming an additional cut, mortgage rates will likely remain in the 6.5%-7% range for the rest of 2024. The Federal Reserve will likely act conservatively to avoid influencing the election.

Long-Term Rates on the Rise

Long-term rate expectations have jumped significantly. Surveyors predict higher long-term inflation, necessitating rate increases to manage inflation risks. While the survey’s accuracy is debatable, its implications for the market are clear.

Higher Rates and Residential Real Estate

Pre-COVID, a doubling of interest rates would lead to a significant real estate price correction. However, strong wage growth and low unemployment have kept prices stable or increasing. This trend may not continue indefinitely. As rates remain high, unemployment will eventually rise, causing a real estate market reset.

Higher Rates and Commercial Real Estate

The commercial real estate sector, particularly offices, is already feeling the impact of higher rates, increased vacancies, and lower rental rates. The Trepp Commercial Mortgage-Backed Securities (CMBS) delinquency rate for all commercial properties rose to 4.66%, up from 2.94% in January 2023, marking a 59% increase over the past year. Office property delinquencies reached 6.30% in January, compared to 1.86% a year earlier. The commercial real estate market reset is just beginning and will likely accelerate with sustained high interest rates.

In Summary

No matter who wins the presidential race, higher mortgage rates are expected due to increased deficit spending and long-term inflation expectations. Commercial properties, especially in the office market, will be the most affected. Residential real estate has been less impacted so far, but a correction is likely as unemployment normalizes. A significant drop in prices, though not as severe as 2008, is anticipated in many markets.