QUESTION
Since the election, our staff has seen a drop in morale. As the CEO, I felt it important to call a companywide Zoom meeting to discuss it. I asked our Chief Compliance Officer and Director of Human Resources to be on the call. During the call, we asked for participation in a survey, which showed quite a divide among staff, especially on how they see the future of mortgage banking and the country.
Overall, the call was a good idea. People felt less intimidated to share their views, but a lot of people held back. Afterward, I received many emails from employees who thought they were not safe to express themselves. The throughline of these emails was that they feared reprisals from people who held political views opposite to theirs.
The two big areas of disagreement began over what will happen to housing prices and the future of mortgage rates. There were arguments about whether the new administration's policies would cause a decline in housing prices and an increase in mortgage rates. The differences expanded and became intimidating.
This is the first time I've encountered such a situation. I am concerned about how this will affect our customer, departmental, and vendor relationships. Now, I know you're not a psychologist. We did an HR Tune-up a couple of years ago, and we had an excellent risk score, but this situation is unusual. I don't think it's an HR issue. We also had you do a CMS Tune-up for our compliance management review. However, this situation seems more like an internal risk. I am concerned about the attitude we bring to mortgage banking relationships. Maybe you could offer some feedback.
I have read your column for years. Members of my firm read your newsletter. I want to post your reply to our company employee page. I have scheduled a call with you this December to discuss new Compliance Tune-up engagements. In the meantime, I urge you to let us know how you view the situation.
What can I tell our employees about the future of housing prices and mortgage rates?
What should I do about the harassment and intimidation issues that are messing with our morale?
SOLUTION
ANSWER
Since the election, I have received an enormous number of emails from clients, non-clients, subscribers, news organizations, colleagues, academics, and even a few retired regulators. As you correctly surmised, our firm only provides guidance based on our expertise in residential mortgage banking. We are not forecasters bent on prognosticating future events. We immerse ourselves in legal and regulatory compliance, conduct audits and due diligence reviews, and prepare our clients for regulatory changes.
Given the outpouring of interest, we are considering offering a webinar on the impact of the election outcome on mortgage banking. If you think this is a webinar you would attend, please let me know here. I welcome your input.
A recurring concern in the emails was the extent to which the new administration will undo regulations and consumer protections. The punditry has been out in full force. I will offer some educated guesses, but they are just guesses. I'll offer some feedback on the new administration's policies with respect to their potential impact on housing prices and mortgage rates. Given your concerns about the morale issues, I will conclude with a few words about mitigating a hostile work environment.
Housing Prices
Reducing or terminating certain regulations might have a positive effect on housing markets. The theory is that less regulation usually leads to more active markets.
I have spoken to a few builders – one of them is a national builder – who believe they will do better in the forthcoming plans to reduce regulations. That said, it seems to me that the supply of homes will still run short of some expectations and depends on the variable of an expanding economy, which generally causes home prices (and rents) to increase.
However, some builders tell me that they expect tax incentives. When I pushed them on this theory, they said to me that increased housing inventory leads to lower home prices – the old supply and demand concept. I noted that the supply/demand ratio has its challenges, too, because lower home prices can, and often are, offset by increases in home buying costs caused by tariffs, which might increase costs, notwithstanding higher mortgage rates.
For instance, the Trump tariffs imposed on Canadian lumber shipped into the U.S. were continued under the Biden administration. That drove up the average cost of a newly built home by about $14,000, according to a 2022 estimate by the National Association of Home Builders.[i]
Maybe there will be further development of "opportunity zones,"[ii] which induce companies (or individuals) to invest in certain low-income areas in exchange for specific tax benefits (i.e., deferring capital-gains taxes). There will likely be the continuation of the Low-Income Tax Credit, which is a federal program ratified in 1986 that provides tax credits to housing developers in exchange for building affordable rental housing.
Other factors that drive up the cost of housing are lot costs, uncertainty regarding the cost and availability of building materials, appraisal concerns, and survey timing. Federal, state, and local regulations also play a role in slowing the growth of the housing sector. How these factors get priced into the housing market will affect housing growth and supply. Notwithstanding the current market, which has pending home sales at their highest level since March, mortgage rates have been higher since early October.[iii]
I do think it is appropriate to factor in the potential for a severe shortage of labor. The shortage is now at 52%. Previously, it was at 58% in 2023 and a record high of 77% in 2021.[iv] The problem of labor shortage worsens because 3,000,000 immigrant workers[v] account for 26% of the construction workforce.[vi] That's a record high![vii] The problem is the proposed plans for mass deportations of immigrants could have a substantial adverse impact on the house-building industry.
There is a growing consensus among economists that deporting undocumented immigrants will further erode construction labor. As one well-known economist, Chief Economist Lisa Sturtevant of Bright MLS recently said:
"…the "mass deportation proposal would have a chilling effect on the construction industry, shrinking the already constrained labor force and stalling badly needed new housing construction." … "At the same time, proposed tariffs will increase building costs."[viii]
In my conversations with builders and lenders, the response I get is that native-born construction workers will take the place of the immigrants. Well, I'm not so sure. According to one study, native-born workers are reluctant to join the construction industry. Their total count remains below the boom levels of the mid-2000s by over half a million.[ix] In fact, one in three craftsmen comes from outside the U.S.
Mortgage Rates
I'm not a prophet, but it doesn't take prophecy to figure out the short-term trajectory of mortgage rates, given the new administration's proposed plans. It seems to me that mortgage rates will remain high for now. I watch the credit markets closely, and I've noted the 10-year Treasury note has risen considerably recently, ostensibly, I suppose, in anticipation of a Trump win; but, remember, the 10-year pulls the 30-year mortgage rate along with it. Treasury yields usually increase when investors expect inflation to increase. In other words, investors are signaling an expectation of rising inflation.
Here's an age-old formula: higher economic growth can lead to higher inflation, and higher inflation can lead to higher interest rates.
Bond yields are rising because investors must be expecting the proposed fiscal policies to expand the federal deficit, meaning the downward direction of inflation will likely turn upward. Put another way, mortgage rates will be higher in the short term because investors are signaling that the budget deficit will not improve, notwithstanding the Fed cutting short-term interest rates. Therefore, unless inflationary pressures subside, it seems unlikely that the Fed will not make deeper interest rate cuts, which will keep mortgage rates high.
During the campaign, Mr. Trump said mortgage rates would come down to 3% or lower.[x] My conjecture can be summed up in the following legal terminology: "Not going to happen!" Or, perhaps it could, if and only if there is a sharp economic downturn. I'm not into major economic crashes or some other kind of nasty economic downturn as a means to bring down mortgage rates. I hope you feel the same way!
Here's another age-old formula: macroeconomic and microeconomic events determine mortgage rates, but presidents have no power to reduce mortgage rates. None. Not even a little bit!
Given the foregoing observations, in the long term, it may be that home buying will peter down, not bubble up.
Several of Trump's plans to impose tariffs could lead to higher mortgage rates through the end of this year. Let us not forget that the federal deficit will impact mortgage rates. I read that the president-elect says he will "charge" tariffs on several countries. Of course, tariffs are a tax paid by American consumers. So, it is the American consumer who is being "charged." Tariffs are import or export taxes added to the cost of goods and passed on to the American consumer. They are highly inflationary. And they often trigger retaliatory tariffs, thereby agitating and increasing the inflationary debacle.
Here's a final age-old formula: taxing American consumers through tariffs, reducing construction labor supply (already severely depleted), implementing tax promises[xi] (i.e., expanding the 2017 tax cuts), increasing the deficit, may lead to a rise in inflation, higher housing prices, and elevated mortgage rates.
Morale
I would like you to consider a few final words regarding your observations that participating employees felt they "were not safe to express themselves" because "they feared reprisals from people who held political views opposite to theirs." I do not want to gloss over this fear, as it has a deleterious impact on the sales and operational processes and could even lead to a hostile work environment. You may face legal liability if you do not correct the issue immediately. If an employee is telling you they feel intimidated or afraid, that may be a sign of a hostile work environment.
Such an environment is where an employee experiences unwelcome conduct, usually severe and pervasive, expressed through offensive behavior, harassment, and discrimination that is severe enough to impact their ability to do their jobs. The fallout on company morale, consumer relations, operations, legal and regulatory risk, and public sentiment can adversely affect a company's risk structure.
When we have done HR Tune-up audits, we occasionally find hostile work environments overtly or covertly taking shape through such conduct as public humiliation or belittlement, unwanted sexual advances or attention, physical threats or intimidation, subjective abuse of the victim, bullying, and jokes and comments related to someone's beliefs and protected characteristics. You should not think that having a company call puts an end to such problems. They rarely do.
So, here's my advice, take it or leave it. I think you should publish a Code of Ethics and Conduct, which must be consistent with state and federal law, that sets forth your policy concerning zero tolerance for a hostile work environment. If you want, we offer a strong Code of Ethics and Conduct.
The Code should
include procedures to mitigate the risk. The procedures should include the
following:
1. Maintaining a detailed record of the harassing
behavior, including dates, times, witnesses, and specific details of what
happened.
2. Informing a supervisor, HR department, or
appropriate authority about the behavior.
3. Bringing in an employment attorney if the offending issue is not addressed adequately.
You have already made a good start by opening the dialogue and recognizing the challenge. Now, you need to ensure that the fears and feelings of intimidation do not create a hostile work environment. Taking prompt action to prevent and promptly correct any harassment[xii] can lead to a safe workspace, boost morale, and potentially avoid liability.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
[i] Since
Pandemic Onset, Lumber Products Have Added $14K to House Price, $51 to Rent,
Emrath, July 14, 2022, Paul, National Association of Home Builders, https://eyeonhousing.org/2022/07/since-pandemic-onset-lumber-products-have-added-14k-to-house-price-51-to-rent/
[ii]
See Tax Cuts and Jobs Act of 2017 (TCJA)
[iii] Pending
home sales hit seven-month high, McAlinden, Fergal, November 27, 2024,
Mortgage Professional (MP), Key Media https://www.mpamag.com/us/mortgage-industry/market-updates/pending-home-sales-hit-seven-month-high/515737
[iv] Labor
Shortages Ease, But Remain Worse Than in the Last Boom, Emrath, Paul,
February 23, 2024, National Association of Home Builders, https://eyeonhousing.org/2024/02/labor-shortages-ease-but-remain-worse-than-in-the-last-boom/
[v] Immigrant
Share in Construction Sets New Record, Siniavskaia, Natalia, November 20,
2024, National Association of Home Builders, https://eyeonhousing.org/2024/11/immigrant-share-in-construction-sets-new-record/. “In 2023, 11.9 million workers, including both
self-employed and temporarily unemployed, comprised the construction workforce.
Out of these, 8.9 million were native-born, and 3 million were foreign-born,
the highest number of immigrant workers in construction ever recorded by the
American Community Survey.”
[vi] The
Role of the Recent Immigrant Surge in Housing Costs, Frost, Riordan,
October 29, 2024, Joint Center for Housing Studies, Harvard University, https://www.jchs.harvard.edu/blog/role-recent-immigrant-surge-housing-costs
[vii] Op.
cit v
[viii]
5 ways Trump's next presidency could affect the U.S. economy — and your
money, Picchi, Aimee, November 7, 2024, CBS News, https://www.cbsnews.com/news/trump-election-impact-on-economy-taxes-inflation-your-money/
[ix]
Op. cit. v
[x] Trump’s
First Broken Promise Will Be 3% Mortgage Rates, Levin, Jonathan, November
6, 2024, Bloomberg, https://www.bloomberg.com/opinion/articles/2024-11-06/trump-s-first-broken-promise-will-be-3-mortgage-rates-election-2024
[xi] What
Trump's return to the White House could mean for the economy and taxes,
Pettypiece, Shannon, November 6, 2024, NBC News, https://www.nbcnews.com/politics/2024-election/trumps-return-white-house-mean-economy-taxes-rcna177690.
"Economists at the University of Pennsylvania estimate Trump’s tax and
spending plans would increase the deficit by $4.1 trillion when accounting for
the effects they would have on the wider economy."
[xii] Harassment,
U.S. Equal Employment Opportunity Commission, https://www.eeoc.gov/harassment
