Brad Bonkowski and Andie Wilson: How Trump’s presidency could impact real estate
December 18, 2016
Most of us view topics through narrow lenses with the underlying theme of: "How will this affect me?" We wanted to understand the potential impact to Northern Nevada commercial property owners under President-elect Trump, with Republicans controlling both chambers of Congress. Trump is a real estate man. However, he's had a vague policy platform on real estate issues. Therefore we referred to data released by Lawrence Yun, chief economist of the National Association of Realtors:
Expect a short-term stimulus to the economy. A combination of tax cuts and government spending upgrading our nation's infrastructure, as well as increased national defense spending, should provide a boost to the economy.
Expect the trade deficit to rise. If tariffs are raised to lessen the trade deficit, expect higher prices. If exports and imports decline, then history has repeatedly shown recession and job cuts soon follow. Most economists believe job training via community colleges are better ways to help those who lose jobs from technological automation and international trade. (Interestingly, this has been a primary focus of our economic development agency, the Northern Nevada Development Authority).
Expect more volatility in the stock market. Wall Street will be happy with less government regulation but unhappy with restrictive international trade policies. The current leader of the Fed may be asked to step down and this perceived intrusion into what should be an independent institution may be viewed by the financial markets as unsettling. Increased uncertainty in the financial markets may stall corporate investment spending decisions. Economic cycles thrive on stability, not on policy uncertainty.
Expect changes to Dodd-Frank financial regulation. While there are possible negative outcomes from this, a positive would be relief in 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 burdens, these small banks will make more loans, boosting home building activity as well as local commercial lending.
Current stringent mortgage underwriting may give way to "normal" lending. We have seen stricter lending parameters in the past eight years, which changed the dynamic of commercial property sales, where cash is now king. High credit scores are a must in current approved lending, evidence credit is still tight. If a Trump administration creates an environment of "we will sue you," lending institutions will retrench and shut off mortgage access to many consumers. If the administration makes clear what is and what isn't an infraction, more mortgages will be provided to consumers.
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Fannie Mae and Freddie Mac made horrendous business decisions in the past on subprime mortgages, creating an internal hedge fund, and being led by political players in an attempt to serve political goals. These mistakes cost the taxpayer hundreds of billions of dollars, and may mean Fannie and Freddie don't survive. Today, Fannie and Freddie are led by technicians providing government guarantees on soundly-written mortgages. All taxpayer bailout dollars have been repaid, and they're doing so well financially the U.S. Treasury is getting added revenue from responsible homeowners. If anything, the guarantee fees are too high and should be reduced. If Washington eliminates Fannie and Freddie because of past sins, mortgages will be much more expensive with 30-year fixed rate products disappearing from the market place. Consider mortgage lending on commercial real estate fell by more than 90 percent in the first few years of the Great Recession as there were no government guarantees for this product. Imagine what the housing market would be like if there were an equivalent 90 percent reduction in home buying!
Community colleges are likely to get more help. That's because we need more workers with trade skills such as welders, plumbers, bricklayers, electricians, nurse assistants, and x-ray technicians. Some of these graduates will go into building homes and commercial real estate development.
Homeowners in flood zones and who suffer through natural disasters may see less relief from the government. Federal programs to assist in wild fires, hurricanes, earthquakes, and other natural disasters are currently $24 billion in the hole. The government may be inclined to reduce government's role and require homeowners pay more. All risks should be properly priced. But the current flood maps for federal insurance coverage are outdated and not useful. Rather than lessen the coverage on federal insurance, more efforts should be made on updating the maps so a better risk assessment can be made.
Expect active discussions on tax reform. The goal would be to simplify — there could be a trimming of the mortgage interest deduction, reducing property tax deduction or depreciation, and cutting of exemptions on capital gains from the sale of a home. There's discussion the like-kind exchange tax deferral (also known in the industry as 1031 exchanges) could be on the chopping block. Research has consistently shown how valuable these tax breaks are for homeownership, protecting private property rights, and economic growth.
Change can be scary, and real property owners should be on alert regarding any policy changes. In reality, there may be as much good news as bad for commercial property owners. There will be plenty of other issues in discussion that also will impact real estate. In summary, if Trump can unite the country and increase confidence and behavior then the economy may expand due to the positive outlook. In the end, there are two important lessons: (1) Perception is reality (so if we feel optimistic, then things are probably good); and (2) As we often challenge our readers: If you move slowly and act with caution and diligence, you will likely come out all right in the end. Panic, knee-jerk reactions, and unsubstantiated worry will never benefit a real property owner, who's typically in for the long-haul.
Brad Bonkowski, CCIM and Andie Wilson, CCIM are owner/brokers of NAI Alliance Carson City, a commercial real estate brokerage. They can be reached at (775) 721-2980.