2016 has come and gone — but not without its share of surprises. First, the Brexit vote shocked the world as the European Union suffered an unexpected loss, and then Donald Trump flouted every poll by winning the presidency over frontrunner Hillary Clinton.
With these upsets came sharp downturns in the respective financial markets, but in the case of Trump’s triumph, the dip was short-lived. Citizens quickly started to wonder what it would mean to have a businessman in the Oval Office rather than a politician.
We have yet to see how the markets at large will fare in the long term, though early growth reports are positive. But when it comes to real estate, I believe Trump’s presidency will provide a significant boost.
Policies at Play
Putting aside differences of opinion regarding his character and party affiliation, Trump is incontrovertibly different than previous career politicians who occupied the White House. We are entering uncharted waters as a nation, but in real estate, the president’s experience is well-established.
All of us in the industry remain painfully aware of the real estate crash of 2007. Thankfully, early signs indicate that Trump’s presidency will continue to bring positive returns on the strong real estate market of late. The recovery track we’ve been traveling down for the past few years has helped real estate prices rise, expand foreign investment, and establish the lowest mortgage rates in decades, all of which I believe should continue — and probably strengthen — during his tenure.
These signs are also a good thing for real estate professionals and real estate investors. I do, however, see three primary areas of policy that will affect the real estate market in the coming administration: foreign investment, taxation, and monetary policy.
Foreign Investment: Trump campaigned for bringing manufacturing and production operations back to the U.S. Critics say these policies will stem the flow of global capital into the U.S. and dampen interest from foreign buyers. They also worry about how higher tariffs might affect the prices of goods, potentially leading to a recession.
While his detractors argue that Trump is taking a protectionist stance that will reduce the total amount of dollars at play in real estate, I see a different outcome. Domestic companies could provide higher employment and stronger wages, ultimately sparking a growth in homeownership. This area is particularly new territory, however, so we have yet to see how these policies will play out.
Taxation: Congress has long discussed reworking and simplifying both the personal and corporate tax structures to stimulate growth. Trump’s policy will likely be effective by 2018, but the question remains whether these tax cuts can truly stimulate the economic growth needed to offset the decline in tax revenue.
If Trump truly does shrink the number of tax brackets from seven to three as he’s proposed, it should cut corporate taxes to stimulate employment and production. Because of this, a reduced burden on the middle-class Americans currently struggling to afford homes could be another boon for the real estate business.
However, the president’s proposal to increase the standard deduction would likely cause fewer people to itemize their taxes, which could become a dilemma for the real estate industry. Politics is never straightforward and their impact even more complex. Fewer itemizations would probably mean fewer people taking the mortgage interest deduction and similar home-related deductions, potentially causing the average home to lose value.
Monetary policy: The real estate industry’s relationship with this variable is mostly concerned with the Federal Reserve and mortgage rates, and the processes by which interest rates are set have so far been less than transparent. Trump’s call for increased transparency could shed some light on the workings of the Fed and give real estate professionals and investors more insight on what to do next.
As Trump takes office, the U.S. GDP growth rate rests at 2.9 percent, with unemployment hovering around 5 percent. If successful, the new president’s economic policies should push wages higher as businesses have more capital to compete for the best workers. The Fed will likely react to this growth by raising rates to prevent inflation, but higher rates are likely to rise slowly.
Ultimately, these changes depend on how successful the new president is in implementing his economic plans and how fast the economy responds. If he is successful and his infrastructure plan receives bipartisan support, what does the future hold for real estate?
In my estimation, the job and wage growth that follow will shortly create a wealthier, more stable workforce that is more likely to purchase homes. How long this economic bump lasts, and its effects on the national debt, will remain to be seen.