The New President Looks Familiar

“Meet the new boss, same as the old boss.” That sentiment feels particularly fitting following Donald Trump’s surprise victory in the 2024 presidential election, returning him to the White House after a four-year hiatus. Despite a highly polarized populace and tight races in key battleground states, Trump’s win ushers forth renewed and/or altered focus on immigration, deregulation, tax reform, tariffs, and federal subsidies.

Donald Trump’s return to the presidency has sparked optimism among some Americans about potential economic improvements. Many expect energy prices to plummet as the U.S. abandons at least some of its renewable energy focus in favor of greater production of fossil fuels. Some anticipate that inflation may decrease, drawing comparisons to lower inflation during President Trump’s first term.

As always, reality may differ from expectation. While U.S. equity markets responded to candidate Trump’s resounding victory on November 5 by surging, with the Dow Jones Industrial Average touching 44,000 and the S&P 500 reaching 6,000 for the first time in history shortly after that fateful Tuesday, bond markets have not rallied.

The Trump agenda is pro-growth and at least arguably pro-inflation and higher interest rates. Shifts in immigration policy are poised to drive labor costs higher, producing higher prices at hotels, for food, and in construction. Proposed tariffs on both perceived enemies and allies alike would also bolster prices by immediately driving import prices higher. The extension of previously rendered tax cuts and additional suggested tax cuts would also generate more inflation by increasing spending power among many households and corporations, driving up demand for goods and services at a time of already strained supply chains and labor markets.

Predictably, a consequence of higher growth forecasts has been higher bond yields. For instance, when the election was considered a toss-up in mid-September, the yield on the 10-year Treasury was approximately 3.6%. As it became clearer to many observers that Donald Trump was gaining momentum, yields began to rise. Shortly after the election, the yield or interest rate on the 10-year Treasury had risen back up to 4.4%.

Mortgage rates have also been on the rise. According to Freddie Mac, the average 30-year fixed mortgage rate in September was a bit less than 6.2%. But by the third week of November, that rate had climbed above 6.8%. That increase can largely be attributed to a shift in inflation expectations, with inflation now expected to be hotter than previously anticipated and interest rates poised to remain higher for longer.

Of course, mortgage rates had already been softening up the housing market for the better part of three years. During the pandemic, many Americans locked into ultra-low mortgage rates. A report from Realtor.com indicates that 84.2% of mortgages are at rates of 6% or below. Many people would like to leave their current home for another but are zealously guarding their hard-fought low fixed mortgage rates (qualifying for a mortgage can be challenging). Consequently, there are both few buyers and sellers, resulting in less time spent by realtors at the settlement table, compromising commission volumes even as average sales prices leapt higher during the pandemic and beyond.

That is very good news from a longer-term perspective. With America’s most populous generation, the Millennials, coming of age and with considerable amount of pent-up demand to both buy and sell homes, at some point mortgage rates will fall far enough to unleash an abundance of pent-up transactional volume. Those stand to be great days for realtors. But for now, mortgage rates are stalemated at elevated levels, and 2025’s policymaking may delay the arrival of lower mortgage rates and may even drive rates higher from current levels.

Residential construction, a cornerstone of the U.S. economy, is already feeling the ripple effects of these anticipated policy shifts. As one of the largest drivers of employment and GDP, the housing market serves as a leading indicator of general economic health. Last year, construction accounted for 3.5% of gross domestic product (GDP) and supported more than 7 million jobs, rendering its performance critical to broader economic stability and prosperity.

Homebuilding activity has been trending lower in recent months. The NAHB/Wells Fargo Housing Market Index fell to 46 in November, an indication that the market is contracting. Since 2024’s onset, the number of monthly housing starts has declined by 257,000 with issued building permits reflecting a similar trend.

That raises some interesting questions regarding residential real estate and construction dynamics in 2025. Will anticipated faster economic growth drive more residential activity and home sales, or will fresh inflationary pressures postpone the long-awaited resurgence of residential sales and single-family construction? Perhaps an assessment of President Trump’s initial term yields some clues.

When He Was Just the 45^th President of the United States

During Donald Trump’s initial term in office, several policies influenced residential construction’s performance. For instance, his administration strove to deregulate much of the economy. With a background in construction in one of the toughest markets in the country, New York City, Trump understood the impact red tape has on developers and contractors. In 2019, he issued an executive order establishing the White House Council on Eliminating Regulatory Barriers to Affordable Housing. Its main purpose was to target and eliminate obstacles impeding housing development.

Prior to that, he signed into law the Tax Cuts and Jobs Act of 2017, which introduced significant changes to the tax code, many of which impacted real estate markets. The law reduced corporate tax rates and provided a 20% deduction on qualified business income. The pro-growth implications of such policy shifts helped drive interest rates higher. By late-2018, the 30-year fixed mortgage rate was in the range of 5%, up from approximately 3.5% at the beginning of that year. But then the market adjusted. Despite more rapid economic growth, mortgage rates had dipped well below 4% by the end of 2019, just before Covid-19 would change just about everything.

During his initial term, Donald Trump also introduced a set of tariffs. Among these were tariffs on imported steel and lumber, which drove up costs for residential contractors. Despite that, a strong economy and favorable interest rate environment kept the single-family housing market humming. The median U.S. home sales price rose from $305,125 in 2016 to $328,150 during President Trump’s final year in office. Those rising prices were not enough to forestall demand for newly constructed housing. For the cycle, housing starts peaked at 1.58 million in January 2020 just before the pandemic undid the economy.

Additional Considerations & Challenges

There are many other challenges facing the residential construction market beyond elevated and recently rising mortgage rates. Among these are:

• Higher residential construction costs due to materials prices that remain far more expensive than they were prior to the pandemic, shortfalls of skilled workers, and expanded compensation costs. Construction is one of the industries that makes the most use of undocumented migrants. Policies designed to restrict the availability of these workers would tend to drive construction delivery costs even higher.
   
• Tighter financing conditions as bankers have become more wary of adding risk to balance sheets. According to data from the Federal Reserve Bank of New York, the rejection rate for mortgage refinance applications reached a decade-high of 25.6% in October, more than 10 percentage points higher than it was a year earlier.
   
• The impact of inflation on household balance sheets, which has rendered it more challenging for many American families to amass downpayments.

Each of these challenges can be placed under the banner of housing affordability, one of America’s greatest economic challenges. According to the National Association of Home Builders (NAHB)/Wells Fargo Cost of Housing Index (CHI), a household earning the median income of $97,800 would have to put nearly 40% of its income towards mortgage payments on a new home. Data indicate a similar percentage paid towards the purchase of existing homes.

NAHB Chief Economist Robert Dietz states, “With the nation facing a shortfall of roughly 1.5 million housing units, the latest CHI data clearly illustrate that a lack of housing is making it difficult for American families to afford to purchase a home. In order to boost the nation’s housing supply, officials at all levels of government must work to eliminate barriers so that builders can build more attainable, affordable housing.”

Looking Ahead

From an economic perspective, 2025 could be a pivotal year, marked by significant developments in Washington, D.C. Financial markets also stand to be volatile as policy pronouncements are made and as implementation changes are announced. The Federal Reserve will also play a part in next year’s drama but may end up doing very little. Prior to a recent uptick in inflation and results of the recently conducted elections, the expectation was the America’s monetary policymakers were poised to reduce interest rates massively in 2025. That is no longer the baseline expectation, with the bond market recently signaling perhaps only two quarter-point rate cuts next year and many economists predicting that there will be none.