What's in store for real estate post-election?

November 14th, 2016 8:37am
The real estate sector could see more business in 2017.

Markets are beginning to price in the reality of a Trump presidency, and for the real estate industry, things preliminarily look promising on many fronts.

For one, investors, analysts and economists are hopeful that someone with a long-standing real estate background will come to the table with insightful ideas on how to spur markets into action. Whether this experience translates into real-world action is to be determined, but it's clear that Trump is already causing those in the industry to rethink what 2017 will look like.

On the agenda in the near term will be when the Federal Reserve will finally raise its benchmark interest rate, how tax cuts and greater infrastructure spending will impact business growth and whether Congress is capable of converting its one-party unity into meaningful progress for the larger economy.

Let's start with what may be most pressing.

The Fed effect
President-elect Trump has had a somewhat combative relationship with Federal Reserve Board Chair Janet Yellen, which may not be the most accommodating stance the central bank was hoping for. This is because most economists agree that the Fed was poised to hike the federal funds target range by 0.25 percent before the end of the year; this was also based on the premise of the economic and political situation largely staying the same. This may not be the case any longer, however.

Without knowing Republicans' true objectives, it could be difficult for the Fed to justify an interest rate increase in December. On the other hand, Bloomberg pointed out that perhaps the biggest confidence boost the Fed needs to finally follow through on a hike is assurance the economy will not react negatively. And because the president-elect intends to slash tax rates and invest in new business growth, economic optimism in 2017 will likely be high - just the conditions that lend themselves well to higher interest rates.

Whether the Fed punts the proverbial ball in December is unclear; however, many analysts project a nominal hike come Q1 2017. Additionally, the central bank may raise rates on a quarterly basis in the year's ahead, provided promising economic conditions still prevail.

This means it will become more expensive for borrowers to obtain mortgages. However, some observers argue that this cost will be offset by higher wages and lower taxes. Further, tighter lending restrictions may not be as prevalent for commercial projects, since larger operations tend to bundle together financing from several different lenders. This could spur developments on future projects and entice businesses to expand into new regions.

Lawrence Yun, chief economist of the National Association of Realtors, stated in Forbes that a Trump presidency will also likely mean a drawdown of zoning and land regulations. With fewer loops to jump through, builders may be able start construction more quickly and do so at a more cost-effective rate. This could be the catalyst for providing more homes to confront high demand, which is especially necessary in several metro areas of the U.S.

How will more infrastructure spending pan out?
One of the largest components of Trump's agenda is a trillion dollar infrastructure spending bill that would revamp the nation's roads, bridges, highways, water and electric system as well as the energy and telecommunication grids.

According to the president-elect's website, without such a dramatic overhaul in infrastructure, the U.S. could lose 2.5 million jobs in the next four years.

In his victory speech, Trump emphasized just how important infrastructure upgrades are to the country, the Washington Post reported.

"I've spent my entire life in business looking at the untapped potential in projects and people all over the world," he stated. "That is now what I want to do for our country. We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals. We are going to rebuild our infrastructure. While will become by the way, second to none. And we will put millions of people to work as we rebuild it."

This level of spending would mean big business for contractors. On nearly every front, the construction industry would see a giant boost in activity, which in theory could provide the next wave of job opportunities for Americans, increasing wages and making transportation more efficient all around.

Higher construction activity could also spill over into the residential sector, especially for companies that operate both residentially and commercially. With funding provided by the government, contractors' margins will likely improve, which could allow them to dive into new housing projects with more confidence.

How will the economy perform?
Trump is expected to propose legislation that would reduce tax brackets down to just three in total, a simplification that will hopefully save time and money for the IRS, businesses and the average consumer.

Likewise, most people would see their individual tax burdens lowered. On the other hand, Trump wants to remove a host of deductions from the tax code, which may offset whatever savings people see come filing time.

Republicans are hoping lower taxes will induce higher consumer spending as well as more hiring opportunities on behalf of businesses that are now paying less money to the government each year.

According to The Wall Street Journal, these policies could potentially kick-start the economy into a higher gear. Over the next two years, the economy is expected to expand at 2.2 and 2.3 percent, respectively, nearly a full percentage point higher than its current pace of growth (1.5 percent).

One of the biggest determinants of whether the economy really starts humming, or perhaps slows down, is if Republicans are able to pass agreeable legislation. Factions within the Republican Party have many qualms with certain planks of Trump's platform, which could prove difficult to overcome once legislation actually comes to the table.

This uncertainty is prevalent in current political discussions and likely won't be resolved until Trump assumes office and decides on what proposals to act on. Until then it will be difficult to accurately ascertain the real estate ramifications inherent in the transfer of federal power.

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