With the presidential election behind us, commercial and residential real estate developers everywhere are wondering how a Trump administration, led by a fellow real estate developer, will affect their industry. So far, Mr. Trump’s policy platform has been largely vague on issues related to real estate.
Understanding how the new administration policies will affect the real estate market is critically important to everyone. We all occupy a space in this major sector of the economy, whether it’s as a buyer, seller, renter, landlord, or homeowner.
Let’s take a look at how a Trump administration could affect the real estate industry in four areas:
1. Potential changes to Dodd-Frank regulations
Dodd-Frank is a federal law implemented after the recession of 2008 that created new financial regulatory processes to enforce transparency and accountability while providing increased consumer protection.
President-elect Trump and other critics have talked about dismantling it entirely. With control of both houses, it is a good bet that changes in this law will occur on some level.
Positive implications – Changes that lift some of the current compliance costs imposed on small banks could be a positive step for the real estate industry. It is these banks, numbering around 10,000 across the country, that have traditionally lent the capital fueling construction and land development. It is thought that lifting some of the regulatory costs from the backs of these small banks will enable them to make more loans. This will stimulate home-building activity and resolve severe housing shortage situations which plague some areas of the country.
Negative implications – There is a real concern that lifting the law’s regulations may once again allow large banks like Goldman Sachs and Deutsche Bank to create another financial crisis, another taxpayer bailout, and another recession like 2008. In such a scenario, the housing market would implode once again.
2. Potential impact of immigration restrictions on the construction labor market and the luxury real estate market
A centerpiece of Trump’s presidential campaign involved curbing immigration and deporting undocumented immigrants. This appealed to some voters, particularly US natives without a high-school diploma, who felt they were having to compete with illegal or undocumented immigrants for jobs.
Positive implications – Most economists agree that immigrants added to the workforce do lower the average wage scale, even if it’s modest. While lots of study has been done, estimates range from 2.2 to 4.7 percent. Tightening immigration laws would, in theory, be a good thing for construction workers who could see their wages rise. This, in turn, could attract more skilled labor to the housing industry.
Negative implications – Curbing immigration could have an adverse effect on the US luxury housing market, particularly in cities like San Francisco, Miami, and New York. A 2016 study by the National Association of Realtors found that international buyers have been key to the bull market in US luxury real estate from coast to coast for many years. Mass deportations and tightening of immigration laws could trigger reduced investment and increase construction costs in the real estate market.
3. Potential impact of lower corporate tax rates
Trump’s tax plan would significantly reduce corporate taxes. Currently, at 35 percent, it represents one of the highest corporate income tax rates in the world. Trump proposes a 15 percent rate which, if passed, would be among the lowest in the developed world. And he would apply that rate to partnerships and other types of businesses that currently pass their profits on to individuals who then are taxed at individual income rates as high as 39.6 percent.
Positive implications – Lowering the corporate tax rate would lower the cost of capital, which would boost investment in the economy (and real estate projects). The increased investment would raise the productivity and wages of American workers and that could fuel a more robust real estate market.
Negative implications – Opponents say that if any reduction in corporate taxes is not financed by immediate spending cuts, it will result in an increased federal budget deficit. The resulting long-term effects would be a reduction in national savings and rising interest rates. This would certainly lead to an overall downturn in the real estate market.
4. Potential impact of new international trade restrictions
Regarding international trade agreements, Trump repeatedly stated during his campaign for the presidency “Our country is getting ripped off.” His concerns about trade manipulation by foreign countries are primarily focused on two countries: China and Mexico. He would renegotiate the NAFTA agreement with Mexico, imposing a 35% tariff on imports from that country. Or, he would rip up the trade agreement entirely. With China, Trump says he would impose a 45% tariff on Chinese imports.
Positive implications – An increase in tariffs on imports from China and Mexico would theoretically stimulate companies stateside to invest in additional production here and bring jobs back to the US. This would result in more tax revenue, which would lessen the budget deficit. The stronger economy would promote consumer spending in real estate as more people would be able to enter the market. Increase demand for housing would lead to growth in the industry.
Negative implications – The trade deficit will undoubtedly rise in 2017 as the economy grows. More Americans are traveling overseas, drinking French wines, and driving Japanese cars. Consumers are more confident about their financial well-being. Raising tariffs to lessen the trade deficit will result in higher prices for everyone. This could lead to a recession and job cuts. The real estate market might become depressed and any growth will be slow, at best.
Only time will tell how the new administration’s actions in these four areas affect the real estate market. Regardless, RVA Property Solutions is committed to a responsible, respectful approach to real estate. Whether you are a seller or investor, feel free to contact us to discuss your situation.