The President-Elect won on a populist platform of “Making America Great Again”. What does that mean for real estate? Let’s look at some of the proposals and determine how they could impact the real estate market.
Tax reform - Lower corporate taxes is giving a confidence boost to CEOs, so corporate investment may go up. This could lead to increased hiring. The labor market is tight, so incomes should rise and give consumers stronger purchasing power.
Simplified tax code – Increased confidence of wealthy individuals may spur spending and investment. The new Administration is also talking about repatriating hundreds of billions that corporations have trapped overseas; this could inject more money in to the US market.
Immigration – The President-Elect’s vow to cut down on illegal immigration could mean a decreased labor force. A decline in this sector of the workforce would result in the need for US workers to fill those vacated positions. Historically, the US labor force has not been willing to do the same labor intensive jobs for the same wages, thus this would force the rise of wages and increase overall construction costs.
Infrastructure Spending - This could create more construction projects, which will take away from the residential and commercial construction industries further driving prices up.
Keeping Jobs In America – The President-Elect has indicated that sanctions will be imposed on corporations that export jobs; His threats to punish countries that have unfair trade policies, like China could lead to trade wars and higher prices for goods. This could take money out of consumer’s pockets and lower GDP.
Deregulation – In the short term, Deregulation could have beneficial effects on the economy as corporations feel less constrained and perhaps increase spending. In the long run there is danger from lax lending standards that could create housing bubbles similar to 2008 and 2009.
Interest rates - Interest rates will rise. They have recently spiked up from historically low levels and will most likely settle around 5-6% by the end of 2017. This is not necessarily negative, as it means the economy is mending. However, it will make housing less affordable to segments of the market thus slowing down home sales. For a more in depth look at how interest rates might affect the housing market, click here.
Home prices - Increasing consumer confidence along with increased government and corporate spending will probably push up prices in the short term. Longer term higher interest rates and the inevitable market correction (recession) will bring prices back down or at least slow down the rate of increase.
In conclusion, the short-term outlook looks bright. Business and consumer confidence should fuel a continued economic expansion for the next 1-2 years. As prices rise and home affordability becomes more challenging this could create a longer-term drag on the housing market, which would slow sales down after the 1-2 year period. These forces combined with we are 7 years into the current economic expansion, and that the expansion cycles are typically 5-10 years long, adds to the conclusion that some sort of recession or downturn could occur in 2019-2020. Of course these are at best guesstimates. Macro-economic shocks or geopolitical risk could always cause an economic pull back prior to that.
If you have been thinking about buying or selling a home, then 2017 is a window of opportunity that shouldn’t be ignored. Prices are at all-time highs and mortgage rates remain well below the long-term trend of 5-7%. Selling at or near a high market and locking in a low interest rate may not be possible as we enter late 2017 and into 2018.