What a Trump Presidency means for the Housing Industry

Opinion Editorial – Mark Boud

In November the unexpected happened, and it may have even taken Mr. Trump’s supporters by surprise.  Though a Republican-led Congress won’t support some aspects of Mr. Trump’s agenda, the direction of the incoming administration will have both positive and negative ramifications for the new home industry.  Here are some thoughts on Mr. Trump’s published plans(1).

Lending – Donald Trump is not a fan of Dodd-Frank and this legislation may be unraveled,(2) resulting in an easing of lending standards.  This might provide Millennials and others more choices and options in financing a home purchase, but may also give rise to the type of lending policies that contributed to the collapse of real estate values in the past cycle.

Mortgage Rates – Mortgage rates are already rising, and it is almost a surety that the Fed will increase interest rates in December. Mortgage rates correlate with inflation, and inflation is likely to rise, being fueled by planned substantial increases in government spending and increases in tariffs and/or reduced free trade. The near-term fluctuations in mortgage rates will translate to gradual increases in 2017, followed by more pronounced increases in 2018 and beyond as the impacts of growth in public spending and reductions in free trade filter through the national economy.

Government Spending – Donald Trump publicly pledged to spend $1.0 trillion on the nation’s infrastructure during the next 10 years on new and improved airports, bridges, highways, and tunnels; as well as moving forward long-delayed projects such as the Keystone Pipeline.  The increase in spending has the potential to create thousands of jobs and generate higher demand for housing. Most of these jobs will need to be filled by construction workers, and construction unemployment is already tight, leading to…

Construction Labor and Costs – There will be increased pressures and strains on an already tight construction labor market due to the expansion of infrastructure jobs and a possible decrease in the size of the immigrant labor pool, resulting in construction workers enjoying higher wages and benefits. The construction industry is already four years into a shortage of framers, roofers, drywallers, and painters and at least 14% of these construction workers are illegal immigrants(3).  Trump’s current policy calls for an immediate deportation of millions of undocumented workers – many of whom are employed in the construction industry.  What happens when an already tight housing industry loses a substantial portion of its labor force to more stringent enforcement of immigration policies, to infrastructure projects, and possibly to the project to build a “Wall’ between Mexico and the United States?  Labor shortages and rising labor costs which already plague the housing market will be magnified and residential construction costs may surge.

International Issues – Mr. Trump intends to eliminate or renegotiate NAFTA, the Trans-Pacific Partnership, and potentially other international trade agreements. Doing so could result in increased prices of imported goods.  The resultant inflation will increase interest rates, mortgage rates, and mortgage-backed securities rates.   This won’t happen overnight, but these sea changes in global commerce may contribute to a more rapid rise in these rates when they do begin to move upward.  Unwinding these international relationships also may damage long-standing international relationships, potentially contributing to increased international instability.

Tax Policies and Debt – We have Mr. Trump’s promise to lower taxes for the middle class. At the same time there is little doubt that the already well established tax benefits for the top 1% of the nation’s income earners will be put on steroids through capital gains and corporate tax cuts.  Lower overall taxes, combined with the planned expansion of infrastructure spending will result in massive deficits, barring steep cuts in other areas(4).  The national debt would balloon at a time when it can be least afforded.  A higher Debt-to-GDP ratio will cause debt holders to demand higher interest payments. Diminished demand for U.S. Treasuries would further increase interest rates, which will slow our economy. Rates have been so low for so long that no one is really paying attention to this, but the debt issue and rising interest rates may become “front-and-center” in economic discussions within the next few years.

In the short run, Mr. Trump’s policies may result in hyper economic activity during the next few years reminiscent of the 2003-2005 run-up to the Great Recession, but the longer term ramifications may produce a national debt crisis that will push the economy into a severe recession.  The task of managing our debt for the next president after Donald Trump might not be an enviable one.

For those builders who can take advantage of the stronger short-term economic climate and find the workers and build the homes, it may be a very healthy three to four years of market activity and price appreciation, but staying abreast of market conditions and the prevailing economic winds is going to be vital to mitigate risk.

For more election coverage and the construction industry’s early response:
Decision 2016: Builders React, BUILDER
Change Won: 5 Key Take-Aways for Builders, Investors, and Residential Developers, BUILDER
How Trump Plans to Fix the Nation’s Infrastructure, Architect
The Mortgage Market is Changing Fast, Wall Street Journal
NAR Election Reaction: Keep Calm and Keep Buying Homes, Realtor.com
Remodelers Respond to Election 2016, Remodeler

Sources:
(1) Donald Trump’s Contract with the American Voter; www.donaldjtrump.com/contract
(2) Trump’s Transition Team Pledges to Dismantle Dodd-Frank Act: Bloomberg News, Nov 10th 2016
(3) Trump’s Deportation Plan ‘Would be Devastating’ for U.S. Builders: Bloomberg News, Sept 14th 2016
(4) National Debt Would Skyrocket Under Donald Trump, Analysis Shows: LA Times Oct 19th 2016