Nov112016

Seven ways Donald Trump’s presidency will impact real estate

Nobody knows what Donald Trump will do, but it’s unlikely he will do anything that hurts real estate.

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Reporters across America reluctantly trashed their canned reports on how Hillary Clinton’s presidency would impact the world. Since Donald Trump’s victory was such a surprise, few thought much about how he would impact real estate, the economy, or anything else for that matter.

Part of the blame is also on Donald Trump. During the campaign, he was long on rhetoric and short on detail. He didn’t need intellectuals to embrace him, so he didn’t pander to them with position papers or carefully crafted policies, leaving us all with a huge void of information on what he will actually do as president. Realistically, I doubt he knows what he will do. He excels at figuring it out as he goes along, and I suspect he will react as he sees fit as conditions warrant. Trump’s campaign vision was to “Make America Great Again,” which leaves a fair amount of wiggle room for interpretation.

Into this void pundits proffer their smart-sounding analyses, but realistically, it’s all a mixture of conjecture, guesswork, and bullshit — my analysis included. What Trump will really do is a mystery — even to Trump. He has no real plan. He’s probably as shocked as everyone else that he actually won. But the fact is he did win, and over the next four years (perhaps even eight), we will all discover what that means.

First, I want to remind everyone that the president has limited power. While his party controls Congress, their control is with the barest of margins in the Senate, and the Democrats can and will use the filibuster to prevent Republicans from enacting much legislation. The Republican establishment hates Trump, so unlike the election of an establishment meat puppet like Jeb Bush, Congressional Republicans may find that Donald Trump doesn’t want to enact their agenda.

Further, since Trump has no real legislative vision or plan, nor has he arrived with a mandate to enact it, don’t expect major legislative reform from a Trump Presidency — unless he reaches across the aisle to find middle ground. Populists are uniquely able to craft bi-partisan legislation because a true populist isn’t beholden to the establishment. Since many of his pre-campaign views were actually far to the left of the Republican establishment, he may further surprise everyone by proposing laws members of both parties may agree upon.

If Trump goes the bi-partisan route — which he may choose to do — it really puts Congressional Republicans in a bind. If they chose to go along with their leader, they will pass many laws they don’t really support. If they chose to resist, they risk the wrath of Trump — and the wrath of his supporters at the polls. Trump doesn’t need much Democratic support to pass legislation if he proposes bi-partisan legislation and gets the Republicans to go along. Basically, he just needs enough support to fend off a Democratic filibuster in the Senate.

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I think Trump may choose to be bi-partisan because he will want to accomplish something. Like his real estate empire, he will want his name attached to legislation. He will do what’s necessary to gain the support he needs to pass something. None of us know what that is yet, but he will want to pass something, and he will find the bi-partisan route open to him. I believe he will take it.

How Trump’s Presidency Could Impact Real Estate

Lawrence Yun, November 10, 2016Lawrence_Yun_bullshit

This is Lawrence Yun’s opinion, so don’t expect much wisdom here.

How will the real estate market be impacted by Donald Trump’s victory and Republicans controlling both chambers of Congress? …

1.There will no doubt be a short-term stimulus to the economy.

My alarm bells are already ringing. Why would a Trump presidency certainly stimulate the economy?

A combination of tax cuts and government spending in the form of upgrading nation’s infrastructure and for national defense will provide a short boost to the economy in the first half of 2017.

He won’t assume office until January 20, 2017, and he won’t pass any tax cuts soon enough to have an effect — assuming he actually proposes tax cuts. Trump spouted a lot of nonsense to get elected. Nobody should be certain he will actually propose any of it. And even if he does propose tax cuts, how does he get tax cuts past a Democratic filibuster?

Inflation will likely kick a bit higher from a faster GDP growth and that will lead to modestly higher interest rates. Accompanying gains in consumer confidence will further move the economy higher. Should the faster GDP growth be sustained and arise out of higher productivity, then inflation will be manageable. Moreover, more jobs will automatically mean more tax revenue, which will lessen budget deficit. Should, however, the stimulus impact give only a short term boost and not be durable then a much larger budget deficit will force interest rates notably higher. The future generation will be saddled with more debt.

If it were so easy to boost the economy, why doesn’t every president do this? He may get Congress to go along with increased spending on infrastructure improvements because it’s a bi-partisan issue that’s generally opposed by Republicans more than Democrats. If he can get Republicans to go along with a huge spending bill, the Tea Party faction’s heads will explode, but plenty of Democrats will likely go along to share the pork.

2. The trade deficit will surely rise in 2017.

Really? To quote Yoda, “So certain are you?”

That’s because a growing economy will allow Americans to drink more Italian wine, drive German sports cars, watch Korean dramas, and play Japanese game consoles. More vacation trips to Cancun and London are also likely.

I like this Trump presidency already. Happy days are here again. It’s those damn Democrats who stopped us from enjoying the good life, right?

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These activities always happen when consumers regain confidence about their financial well-being. Should tariffs be raised to lessen the trade deficit, consumers will face higher prices.

Isn’t one of Trump’s ideas to increase trade barriers? His campaign rhetoric was not that of an open-markets capitalist.

If exports and imports significantly decline, then history has repeatedly shown that recession and job cuts soon follow. Most economists believe job training and re-training via community colleges are much better ways to help those who lose jobs from technological automation and from international trade.

This entire discussion on the trade deficit is nonsense.

3. There will be more gyrations in the stock market. Wall Street will cheer less government regulation but will frown on restrictive international trade policies. The current leader of the Federal Reserve, Janet Yellen, may be asked to step down and this perceived intrusion into what should be an independent institution may be viewed by the financial market as unsettling. …

Predicting gyrations in the stock market? That’s a low-risk prediction. He will look like a genius.

4. Changes to Dodd-Frank financial regulation will occur in some form.

Don’t hold your breath.

A clear positive would be the lifting of compliance costs imposed on small-sized banks. Around 10,000 local and community banks have traditionally been the source of funding for construction and land development loans. With less regulatory burden, these small banks can make more loans and will boost home building activity – something that is needed in the current housing shortage situation. But changes to financial regulations on large banks like Goldman Sachs and Wells Fargo could again lead us back to the days of cowboy capitalism and consequent exposure to a massive taxpayer bailout.

There will be no meaningful reform of Dodd-Frank, and the Consumer Financial Protection Bureau will survive intact. The Democrats will filibuster any attempt to kill Dodd-Frank. With only 51 Senators and no mandate that Democrats fear, to get 60 senators to agree to close debate simply isn’t going to happen. The same is true for ObamaCare. It’s not going anywhere.

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Some suggest that the Senate may go nuclear and kill the filibuster. This idea comes up whenever one party controls the Presidency and Congress, like the Democrats did in 2008. The filibuster is a tool of the minority to ensure laws they passed previously don’t get repealed easily. The filibuster stabilizes our political system.

Let’s assume the Republicans go nuclear and repeal the filibuster. They would use their bare majority to pass all the legislation they want, even without a single vote from a Democrat. While this sounds very appealing to Republicans, what happens when Democrats take control again? Won’t they use the same power to undo everything passed by the Republicans and start the cycle over again?

For as frustrating as some find the filibuster, it exists for a reason, and the Republicans know this. They won’t go nuclear because they know the Democrats will retaliate in kind.

5. There could be a move away from stringent mortgage underwriting to more normal lending. Credit is still tight for mortgages as evidenced by very high credit scores among those who are getting approved. An important reason for overly-conservative lending is due to the exposure of random lawsuits by the government on lending institutions in recent years. To the degree that the Trump Administration makes it very clear as to what is and what is not an infraction then more mortgages will be provided to consumers. Should the Trump Administration create an environment of “we will sue you” then the lending institutions will retrench and shut off mortgage access to many consumers.

None of this is handled at the administrative level. These standards are at the level of the bureaucracy, and Dodd-Frank set up the Consumer Financial Protection Bureau under the Federal Reserve Board to prevent it from being gutted by future Republican administrations. Trump can do nothing about mortgage underwriting standards, and he won’t try.

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6. There could be less regulatory land-use and zoning burden for home construction, and thereby lower the cost of building. In recent years, newly constructed home prices have been much higher than existing home prices. Homebuilders say that is due to all the extra cost of regulation and not necessarily from higher input cost of lumber, cement, and worker wages. President Obama’s economists in fact wrote a white paper on the topic of lifting this burden. President Trump will likely try to move this issue – though jurisdictional issues of federal versus local will be contested.

While everyone in my industry hopes for this outcome, it’s not realistic either. Land use and zoning regulations are local. No local jurisdiction wants any outside agency to tell them what to do. I proposed that we need a California Housing Commission to help facilitate residential development here in California, but even that will be vehemently opposed by local jurisdictions. How do you think the locals will react to a federal government mandate to change their rules? They will react with lawsuits — lots of them. Unfortunately, there will be no reduction in regulatory burdens imposed by local governments on land use.

7. Fannie Mae and Freddie Mac may not survive. This would be most unfortunate. …

This is an area where I am actually hopeful. And, no, it would not be unfortunate.

If Washington’s instinct is to eliminate Fannie and Freddie because of their past sins from past managers, then mortgages will be much more expensive with 30-year fixed rate products disappearing from the market place. Consider: mortgage lending on commercial real estate collapsed by over 90 percent a few years ago during the financial market crisis because there are no government guarantees for this product. Imagine what the housing market would be like if there was an equivalent crash of 90 percent reduction in home buying. We should view supporting Fannie and Freddie in the same way as we view supporting FDIC deposit government guarantee at banks – to help smooth the financial market. …

Contrary to Republican rhetoric, any reform of mortgage finance will include guarantees on 30-year fixed-rate mortgages. This is one issue where Trump could get bi-partisan cooperation on a plan to do away with the GSEs in favor of some other form of mortgage insurance. Johnson-Crapo crafted a great plan a few years ago, but it never found much support in the Senate, so it languishes. This is an opportunity for Trump to put his name on good legislation.

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Many people decry Trump’s lack of government experience, claiming he’s unfit for office. Perhaps he is, but he’s a bright guy who will figure it out as he goes.

Nobody claims he is ignorant about real estate issues. His financial empire is built on real estate, and by any objective standard, he is a real estate expert. Though we can’t be certain at this point what he will do, I strongly suspect he won’t do anything that will hurt real estate. He knows too much about the sector, and he’s personally invested in it, so whatever he does for real estate, I expect it to be positive.


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