Despite Trump's Volatility, Most Real Estate Markets Heading to Solid Gains in 2017
Deregulation. Or less regulation. That's the magic wand President Donald J. Trump, a homebuilder by birth, is waving over the nation's real estate industry today. Any deregulation action will help the real estate business. Take it from the nation's seers, most, if not all real estate categories in the United States this year, are headed for solid gains. There will be unexpected pitfalls, of course, in the commercial, residential, industrial and retail sectors. But as a whole, the bulk of the signage in the real estate industry, under Trump, will be positive. The luxury residential market worldwide will continue to be busy, largely with cash deals, many from Asia-based investors. Still, for example, a negative arrow surfaced on many charts right after Trump's inauguration on January 20th. Realtors nationwide were shocked. The Department of Housing and Urban Development (HUD) had "suspended indefinitely" a previously planned decrease in the annual mortgage insurance premium on home loans insured by the Federal Housing Administration (FHA). The FHA is the world's largest mortgage insurer. The National Association of Home Builders (NAHB), the National Association of Realtors (NAR) and other Realtor groups immediately urged Trump to review his decision and reinstate the cut. According to NAR President William E. Brown, an estimated 850,000 home buyers will face higher costs and about 40,000 new home buyers will not be able to afford homes at all in 2017 because of the HUD ruling. The Obama Administration announced the cut January 9th. It would have reduced the annual insurance premium on most new FHA mortgages to 0.6 percent from the current 0.85 percent. That quarter point cut, for example, would have saved a homeowner with a $500,000 mortgage $1,250 a year. First-time homebuyers like FHA loans because they require lower down payments, some as low as 3.5 percent. The loans also require lower credit scores (generally down to 580), compared to loans from Fannie Mae and Freddie Mac. Fannie and Freddie require mortgage insurance on loans with less than 20 percent down, but the insurance comes from private-sector insurers. The FHA charges borrowers a one-time mortgage insurance premium. That premium amount can be rolled into the loan, and an annual premium that is added to the monthly payment. These premiums then go into the FHA's Mutual Mortgage Insurance Fund which covers any losses on FHA loans. Before the housing crisis, the annual premium on FHA loans with less than 5 percent down was 0.55 percent. However, sharp losses forced the FHA to increase this premium up to 1.35 percent by April 2013. Since then, the fund's health has improved and the premium was cut. According to Walter B. McKenzie of The Image Bank, a company owned by New York--based Shutterstock Inc., about 35 million families deducted their property taxes from their federal taxable income in 2016. They saved a total of $33 billion. This deduction makes it easier for school districts to raise money from property taxes. But this deduction is now targeted for elimination in the House GOP blueprint. McKenzie's research shows nearly 34 million families claimed the mortgage interest deduction in 2016. That deduction reduced their tax bills by $65 billion. Some economists argue the deduction is an inefficient way to promote home ownership. But it has strong support among home owners and every industry associated with buying and building homes. For now, the House GOP is keeping this deduction as is but it could be shaved later for high-priced homes. Especially in danger of being eliminated from future use on federal tax returns are state and local taxes. McKenzie's numbers show more than 43 million families deducted their state and local income, sales and personal property taxes in 2016. The deductions reduced their federal tax bills by almost $70 billion. More than 90 percent of taxpayers who itemize take advantage of this deduction. But the House Republican blueprint would repeal the deduction to help pay for lower tax rates. In an email to Trump earlier this year, Granger MacDonald, chairman of the 140,000 member National Association of Home Builders and a home builder and developer from Kerrville, TX, urged the President and the Congress "to keep housing a national priority, to provide regulatory relief for the nation's small business community and to advance policies that will expand homeownership and rental housing opportunities for all Americans." On a different note, it remains to be seen whether Republicans can stop the FHA from providing taxpayer-guaranteed mortgages to wealthy home buyers. That, too, was one of Trump's many things-to-do he said, when he became President. One way or another, that decision is not expected to seriously affect the luxury residential market since many of the transactions are all-cash. But other Trump tweets could affect other segments of the home market. For example, a few wealthy Chinese condominium buyers fled San Francisco after the President announced during his campaign and even after his Jan. 20 Inauguration that a trade war between China and the U.S. was still possible. If the Chinese investment block as whole feels it is unwelcome in the U.S., this country may lose a serious part of the luxury home market business. Continued political unrest in the U.S. could drive foreign investors away from this country and into secondary luxury residential markets such as Melbourne, Amsterdam and Vancouver. But looking at it from another angle, Trump's proposed tax breaks to companies and their wealthy executives could open the door even wider for American company chiefs to invest, especially in the New York markets. Right now, Wall Street is healthy and so is supply and demand in the New York markets. New York is considered a safe haven for foreign money. The Miami-Dade condo market is flush with properties, carrying a three-year inventory of high-end homes. Housing activity generally is expected to get a boost if Trump's planned tax breaks for corporations and the country's billion-dollar investment in infrastructure are approved by the Congress. British brokers are mostly optimistic about Trump's potential affect on the London housing market. They seem to agree with his vision for smaller, not larger international trade markets. Because of that feeling, British brokers see American luxury market hunters continue buying into popular London metro investment areas like Regent's Park, Grosvenor Square and West London. Another favorable assist to the British luxury home market, as well as to the commercial side, could come from Middle Eastern buyers - especially if Trump's vitriolic anti-Islamic rhetoric doesn't slow down. The Middle East investors would be switching their current sights from Los Angeles and New York. A chain of retail stores in the Middle East already has halted selling Trump-branded home décor products. His name also has been stripped from a golf course under development in Dubai. And in Dubai's high-end housing market, that sector is expected to receive a boost if political uncertainty continues to face the U.S. and Brexit-headed United Kingdom (UK). On the commercial real estate side, there has been no immediate shock and awe announcement to date from the White House comparable to the residential edict. But several new scenarios are envisioned as Trump's plans to deregulate all industries are being worked out. For example, commercial developers are heartened by White House corridor talk of preserving the 1031 tax-free exchanges, income tax cuts for all filers and the carried interest exemption for investment managers. Trump's previously announced plans to quadruple previous Administration spending on the nation's roads, bridges and airports, and new immigration policies will probably reduce the supply of low-cost labor and could lead to a higher inflation level and also higher interest rates. If that happens, foreign investment to the U.S. would probably fall and population growth would be dampened, two factors that would affect the commercial real estate market. Real estate investment trusts (REITs) especially would experience short and long-term results. Generally, conventional wisdom has held that higher interest rates are negative for REITs because of the inverse relationship between the cost of debt and the rate of return on equities. Over time, however, inflation leads to increased rents and strong capital gains on real estate investments. High government spending could also stimulate the economy. Such activity could increase the value of REITs and other real estate equities. Still, a cloud over the entire real estate industry hangs over Trump's proposals to limit immigration into the U.S. through visa restrictions or to deport a large number of illegal immigrants who have lived here for many years. Such actions would, of course, slow or halt all foreign investment here and immediately drive up the cost of all new commercial ventures because of labor shortages. In the regulatory field, two well-known buffers - Dodd-Frank and Basel III - are expected to be weakened by the Trump Administration. Changes in the Dodd-Frank Wall Street Reform and Consumer Protection Act could give community banks more freedom in lending to previously considered risky individuals or entities.
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