The week after the election Lawrence Yun, Chief Economist with the National Association of Realtors and Forbes contributor wrote an article on how a Trump administration could affect the Economy with emphasis on the real estate market. You can view that article here : How Trump’s Presidency Could Impact Real Estate. Yun’s piece is mostly cautiously optimistic with few warning signs thrown in. I also remain cautiously optimistic that the minority party in the house and the senate can keep the incoming adminstration in check and protect policy that benefits the middle class.
In his article Yun writes “There will no doubt be a short-term stimulus to 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. 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. “ . I completely agree on the government spending on infrastructure, it is desperately needed, long overdue and should be done while interest rates are still low. It most certainly would produce the desired effects on economic growth. President Obama proposed this very spending in 2008 and it was cut drastically by House republicans due to deficit concerns, I somehow doubt those concerns will still exist come January. Cutting the Obama stimulus is what led to the slower recovery in economic growth out of the horrible financial crisis and recession inherited by the last Republican administration. The tax cuts on the other hand are just more supply side nonsense! Cutting taxes on Corporations and the wealthy will do nothing to spur demand and economic growth and as Yun himself points out will saddle future generations with more debt. Corporate taxes and those of the very wealthy are already low, the economy is not underperforming for want of an influx of capital but is in need of steady demand, demand that has historically been provided by a growing middle class not a contractionary one. Cutting taxes on the middle class while securing and protecting the social safety net, however would narrow the income inequality gap and increase disposable income within the populace that really needs it to drive demand. This would in the long run make everybody including the wealthy richer.
On Trade Yun comments, “The trade deficit will surely rise in 2017. 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. 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. 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.” Americans may consume more foreign goods if they feel their incomes are rising, however that consumption may be stunted by belligerent trade policy as Yun points out. I believe that travel abroad and tourist dollars (a 1.6 Trillion-dollar Industry) flowing in to the United States will certainly diminish as Americas standing in the world will certainly take a hit. Yun completely fails to mention the oil markets and what may happen with it if campaign trade policy and immigration promises are kept, we’ll have to wait and see I guess.
Mr. Yun goes on to point out that we are likely to see “more gyrations” in the stock market during Trump’s term as Wall street will find much of his policies beneficial and other policies disrupting. His unpredictability will certainly cause spikes and selloffs in the financial markets, we have already seen this the week of the election as mortgage interest rates saw their biggest jump in a week since July 2013.
Our history lesson of 2008 will soon be forgotten as Changes to Dodd-Frank Financial reform will most likely happen, Yun believes this may have some benefit if lifting restrictions on smaller local and community banks in turn leads to source funding for construction and land development for badly needed housing. However, it most likely will lead to avarice and malfeasance on the part of the larger lenders like Wells Fargo and Goldman Sachs as the days of “cowboy capitalism” return.
Yun speculates that there could be a loosening on the tight credit market as underwriting restrictions are eased. This is a fine line to walk as we don’t want to recreate the conditions that led to 2008.
Yun also speculates that Fannie Mae and Freddie Mac may not survive, he writes “This would be most unfortunate. Let me be clear, these two institutions made horrendous business decisions in the past to buy subprime mortgages, create an internal hedge fund, and be led by political players in an attempt to serve political goals. That mistake cost hundreds of billions of taxpayer dollars. Fortunately, after management changes Fannie and Freddie today are led by technicians providing a government guarantee on soundly-written mortgages. As a result, they have repaid all the taxpayer bailout money. Moreover, they are doing so well financially given the very low mortgage default rates, that the U.S. Treasury is getting added revenue on the backs of responsible homeowners. If anything, the guarantee fees are too high and should be reduced. 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.” Let’s be clear here about who wants to eliminate these quasi-governmental institutions, it’s the republican party and Yun is absolutely correct that to do so would cause dire consequences for middle class homebuyers nationwide and tank the housing market.
Yun seems to think that under a Trump administration Homeowners who suffer through a natural disaster may get less relief from the Government. He speculates that the Government’s instinct could be to reduce its role and have homeowners pay more due to a 24 billion deficit with the program. He correctly points out that while all risk should be properly priced the current federal flood maps are outdated and not very useful and more effort should be made on updating the maps so they better assess the actual risk.
Finally, Yun fears that with all the talk on the right about tax reform and simplifying the tax code there could be the trimming or elimination of the mortgage interest deduction, reducing property tax deduction, and cutting of exemptions on capital gains from the sale of a home. I however remain a bit more optimistic on this front as congressional Democrats would never go along with the elimination of these tax cuts as they greatly benefit the middle class. I wouldn’t worry about the commercial real estate depreciation deduction either, as the Donald has successfully used that to forgo paying any taxes for the last 18 years.
There will be a lot of interesting economic and housing issues to cover in the near future. We’ll keep a close eye on them in the coming months.