What Does A Trump Presidency Mean For Housing?
by Daniel Beer
There was very little talk about housing throughout the election, unlike in 2012 when it was a major focus. Despite that truth, housing is set to be majorly impacted by the new administration. Admittedly, much more than I had considered or believed to be true just a short time ago.
There are major components at play that look to greatly impact our local housing market, especially being a coastal Southern California city. The way the environment is shaping out is largely driven off of inflationary rhetoric, financial deregulation and uncertainty. Let’s explore each.
But first, if at any time you want to have a conversation about the housing outlook and how it affects your personal situation, please reach out and we will do so privately.
Higher interest rates have already begun. In fact, as of the time I am writing this article on November 15, 2016, interest rates a half point higher than the day prior to the election. That is a massive change in a short amount of time. So why is this happening?
There is general sentiment in the equity markets that Trump will establish pro-growth policy that should push equities higher. So as of the time of this article being written, stocks are up dramatically. But at the same time, much of the money flowing into stocks has been coming out of the bond market, which has pushed the benchmark 10-year treasury note higher along with rates.
The uncertainty of what a Trump presidency means has a lot to do with both domestic and foreign investment flowing out of our bond market. The traditional safe haven investment doesn’t feel quite as safe as it typically does. At least not for now.
Trump is also throwing around the prospects of a half billion to a trillion (not a typo) dollar domestic spending plan. He intends to rebuild roads, bridges and refurbish other parts of our infrastructure. There is no doubt we could use that, but how will we pay for it? This all while cutting taxes.
Bond investors have become very concerned about how we will answer that question and have been selling off bonds, which has caused rates to rise. The bond bull market, which has been raging for decades, is finally on its way to a probable end unless the Fed steps in and intervenes with its own agenda. Which is a whole nother can of worms.
That type of spending and his protectionist talk about bringing back jobs and raising taxes on imported American goods all create an inflationary environment, which supports higher rates.
Of course, when rates rise, buyer spending power is reduced so real estate gets more expensive for buyers even with no price movement. The cost of borrowing just gets more expensive and pushes buyers out of the market place.
The other thing that happens with higher interest rates is that rents also can rise even further than they already have. The reason being that if rents rise too much relative to rates, then a percentage of renters are incentivized to buy because renting gets more expensive vs buying. But when rates are moving up, that allows rents to rise without turning renters into buyers. It will be interesting to watch this play out, but apartment investors are licking their chops.
Typically, higher rates mean lower home prices. But that is only in the case when all else is equal. In the case of Trump, there is more to the story. And it is called Financial Deregulation. Specifically, the elimination or reshaping of Dodd Frank, the massive bill that was put into law following the mortgage meltdown of 2008/2009.
Deregulation would lead to looser lending standards, which would make more money available to more buyers. That would be welcome relief to the tight market we have seen since 2009 as more home buyers would be able to qualify for loans or bigger loans. However, as with most things, the risk is that at some point the market could take that too far and bad loans could grow in popularity.
It is unlikely we would ever get as stupid as we were during the last market collapse, but looser lending standards would almost certainly lead to more default in the long run. The way I read that is there could be more upside than we had originally anticipated, but there is also likely to be a steeper fall on the other end.
Let me be clear that I am in no way shape or form predicting a 2008 disaster. The vintage of loans since then has been too strong. We will, however, see a down cycle (as we always eventually do) and I now fear it will be a little steeper than we previously thought.
Savvy investors will be watching this very closely with plenty of cash ready to go and grab opportunities as they present themselves.
Come end of year, it is important to review your real estate holdings and take a close look at the housing environment. That is true in any year, but is possibly more true now than ever. Book a private market outlook meeting by emailing me at email@example.com.