Dec162016

Homebuilders love Donald Trump

Homebuilder confidence rose the most on record last month entirely due to the election of Donald Trump.

I spent most of the last four months meeting with homebuilders. The people in my office spend most of their time dealing with homebuilders. As a group, we interact with all of them, so we have a unique perspective on homebuilders’ world view.

Despite being in California where an overwhelming majority of people are Democrats, homebuilders are mostly Republican. Homebuilding is an entrepreneurial business that chafes at regulation, so it shouldn’t be terribly surprising to see so many Republican homebuilders.

If Hillary Clinton had won, I don’t believe homebuilders would have been despondent, but they would have expected more of the same — increasing regulations and slow economic growth. When Trump surprised everyone and won the election, homebuilders were thrilled at the idea of a real estate entrepreneur running the country.

Even in the five weeks since the election, we’ve noticed changes in attitude and action among homebuilders. Most noticeable is the change in attitude among small homebuilders. Many were cautious about the future, but now full of hope, they are closing on deals and preparing to ramp up construction in 2017. Though correlation is not causation, in this instance, Trump winning the election made a difference.

Builders’ confidence in the future soars.

Homebuilder sentiment spikes 7 points, Trump has them feeling fantastic

Diana Olick, December 15, 2016

Call it the Trump rally in homebuilding — not the stocks, but the sentiment of the builders themselves.

A monthly reading of homebuilder confidence spiked 7 points in December, its first measure done after the presidential election.

The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) rose to 70, the highest level since July 2005. Fifty is the line between positive and negative sentiment. The index has not jumped by this much in one month in 20 years. It stood at 60 one year ago.

This notable rise in builder sentiment is largely attributable to a postelection bounce, as builders are hopeful that President-elect Trump will follow through on his pledge to cut burdensome regulations that are harming small businesses and housing affordability,” said NAHB Chairman Ed Brady, a homebuilder and developer from Bloomington, Illinois.

I add my anecdotes to his. The change in attitude and action is palpable in the industry.

Of the index’s three components, current sales conditions increased 7 points to 76, sales expectations in the next six months rose 9 points to 78 and buyer traffic rose 6 points to 53. This is the first time buyer traffic has been in the positive since October 2005.

Why do homebuilders suddenly believe sales will rise so much next year?

First, Trump’s tax plan will shift housing demand from move-ups to entry-level. An increase in the personal exemption is a major tax cut for low-income and middle-income Americans because it reduces their taxable incomes by $18,400 per year. Increased disposable income will increase demand for low-end housing.

Second, Trump will lobby the Federal Reserve to allow the economy to run hot. Household income is a fundamental determinant of house prices. If more people find jobs, and if people earn more money, real estate should respond favorably both in volume and in price, which is particularly good news for homebuilding.

Third, Increases in the FHA loan limit will improve sales. The FHA loan limit inhibits sales because many families could borrow more than the limit, but they lack the down payment. Increasing the limit opens up the buyer pool and allows homebuilders to provide more product under the limit.

“Though this significant increase in builder confidence could be considered an outlier, the fact remains that the economic fundamentals continue to look good for housing,” said NAHB Chief Economist Robert Dietz. “The rise in the HMI is consistent with recent gains for the stock market and consumer confidence.

The shortage of MLS listings is a boon to homebuilders because resales are direct competition. Plus, despite rising mortgage rates, they are still very low by historic standards.

At the same time, builders remain sensitive to rising mortgage rates and continue to deal with shortages of lots and labor.”

Mortgage rates have been on the upswing since the election, with the average rate on the 30-year fixed moving higher again Wednesday, after the Federal Reserve announced its expected quarter-point hike in the Federal Funds rate and that it would likely raise rates three times next year.

This is a problem. Rising mortgage rates will price out marginal buyers in 2017. For every 1% mortgage interest rates rise, it raises the cost of ownership by 11%, and as ownership costs rise faster than incomes, marginal buyers get priced out of the housing market and sales suffer.

Homebuilders are a surprisingly optimistic lot. Perhaps as entrepreneurs taking huge risks, they need optimism to remain sane and calm. Each year in December, homebuilding slows down, and most homebuilders take a few moments out of their busy schedules to contemplate the coming year. Optimism abounds in December, but couple that natural seasonal pattern with an unexpected Trump victory in the election, and homebuilders will enjoy a very merry Christmas and a happy new year.