In just under six weeks, Donald Trump will be sworn in as the 45th President in American history. The media is focusing on his tweets, his visits with Kanye, and occasionally his cabinet picks. However, it's his policies that should have our attention. While it's still too early to come to conclusions, it is worth examining what President-Elect Trump has indicated he will do and how it might impact the housing market.
The Good
Trump wants to do a massive infrastructure program. On the surface, this should be good for the economy as it's essentially a giant stimulus package. Stimulus spending pumps money into the economy both directly (the actual spend on the program) and indirectly (the increased spending by the individuals who get paid for doing the work). This is called a 'multiplier' which means a dollar spent turns into more than a dollar of economic activity, in theory. A new job site in an area, for example, creates additional economic impact beyond the work at that site. Think of it this way: people need gas to fill up cars, places to eat, basic services, etc.
Trump has also indicated that he wants to roll back regulations both on banks and on construction. The reality is that Trump can't impact construction costs too much as those regulations are typically local and not federal. However, he can (with Congress) do a lot to relax guidelines on the banks. This could allow banks to lend more easily, and allow more customers the ability to access credit. As long as this isn't taken too far, this could be a good thing.
Finally, Trump has indicated that he wants to push tax reform and plans to push a major tax cut. This sounds good for the industry, in principle, and will certainly make businesses and investors happy. The tax break for average people isn't likely to change affordability in a material way. However, financial decisions aren't simply about math; they are also about how people feel. Seeing more coming into your bank account can lead to more spending and/or more confidence (which can also lead to more spending).
The Potential Challenges
Trump's infrastructure plans create some risk for the industry too. A massive infrastructure bill could draw more labor away from housing, and we already have a labor shortage. This would drive up costs and is especially problematic if Trump actually takes a hardline stance on immigration. Net migration has essentially been net zero since 2009, and housing relies on this labor pool. The contrarian view, though, is that increased construction activity could pull folks back towards the industry as they look to take advantage of the stimulative effect.
Trade was one of the big issues of this campaign and now poses a big question mark. Trump wants to make our trade deals better. If Trump can keep expanding market access for American companies to sell goods while protecting local jobs, then that's great. The risk, however, is that this could lead to tariffs and more expensive goods at home which would negatively impact affordability, decrease dollar value, and act as a drag on the economy.
The stock market, largely on the back of the tax and infrastructure plans, has pushed up since the election. That has also pushed up interest rates as investors sell off Treasuries for more profitable options. Interest rates will impact affordability much faster than any other factor.
The final challenge is less economic in the immediate sense than it is fiscal. Trump's plan borrows plans from the Democrats (infrastructure stimulus spending) and pairs it with plans from the GOP (tax cuts and deregulation) in an attempt to ignite the economy. Essentially, he's planning a massive tax cut and a massive spending plan at the same time. This plan is designed to get us to a sustained 4% growth which we haven't seen in decades. If Trump can achieve this, then all stand to gain. If, however, we don't get that at a sustained level, the combination of tax cuts and increased spending will apply substantial pressure on our already strained federal, state, and local budgets which could become a major drag in the medium to long-term.
Oren Jacobson holds an MBA with an emphasis in strategic management and is currently working on receiving his master's degree in economics and policy analysis at DePaul University in Chicago. As the lead strategic marketing analyst for New Home Star, Jacobson specializes in helping builders maximize their asset positioning through market segmentation, consumer alignment and data analysis. He also leads the NHS team in the creation of training tools and resources to develop and enhance their expertise in sales.
