Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
Well, well. The underdog won.
To be honest, I don’t care about your political persuasion or who you voted for. But I do care about what a Trump presidency means for real estate in general, and real estate investing in particular.
To be sure, during the campaign Trump brushed some broad strokes about what his policy priorities were going to be after his inauguration, but he was pretty light on the details.
And that makes sense, because as a CEO, he’s used to setting the direction, and then finding the best people to carry out his vision.
So we’re left wondering what he’s going to do, and how it’s going to impact us.
I read an article recently that did a pretty good job of walking through what might happen. And as an econ major, I even agree with a lot of it! LOL!
So here’s what they project…
There will no doubt be a short-term stimulus to the economy.
A combination of tax cuts and government spending in the form of upgrading the nation’s infrastructure and for national defense will provide a short boost to the economy in the first half of 2017.
Inflation will likely kick a bit higher from a faster GDP growth, and that will lead to modestly higher interest rates. Accompanying gains in consumer confidence will further move the economy higher. Should the faster GDP growth be sustained and arise out of higher productivity, then inflation will be manageable.
Moreover, more jobs will automatically mean more tax revenue, which will lessen the budget deficit. Should, however, the stimulus impact give only a short-term boost and not be durable, then a much larger budget deficit will force interest rates notably higher…
The future generation will be saddled with more debt.
There will be more gyrations in the stock market.
Wall Street will cheer because of less government regulation but will frown on restrictive international trade policies.
The current leader of the Federal Reserve, Janet Yellen, may be asked to step down and this perceived intrusion into what should be an independent institution may be viewed by the financial market as unsettling.
Perhaps Mr. Trump relishes in his unpredictability. But the rise of uncertainty in the financial market will hold back corporate investment spending decisions. History says that economic dynamism thrives on the rule of law and not on whims of policy uncertainty.
Institutions of law matter much more than any one person or a group of people.
Changes to Dodd-Frank financial regulation will occur in some form.
A clear positive would be the lifting of 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 burden, these small banks can make more loans and will boost home-building activity – something that is needed in the current housing shortage situation.
But changes to financial regulations on large banks like Goldman Sachs and Wells Fargo could again lead us back to the days of cowboy capitalism and consequent exposure to a massive taxpayer bailout.
There could be a move away from stringent mortgage underwriting to more normal lending.
Credit is still tight for mortgages as evidenced by very high credit scores among those who are getting approved. An important reason for overly conservative lending is due to the exposure of random lawsuits by the government on lending institutions in recent years.
To the degree that the Trump Administration makes it very clear as to what is and what is not an infraction, then more mortgages will be provided to consumers.
Should the Trump Administration create an environment of “we will sue you,” then the lending institutions will retrench and shut off mortgage access to many consumers.
Fannie Mae and Freddie Mac may not survive.
This would be most unfortunate.
Let me be clear, these two institutions made horrendous business decisions in the past to buy subprime mortgages, create an internal hedge fund and be led by political players in an attempt to serve political goals...
That mistake cost hundreds of billions of taxpayer dollars. Fortunately, after management changes, Fannie and Freddie today are led by technicians providing a government guarantee on soundly written mortgages.
As a result, they have repaid all the taxpayer bailout money. Moreover, they are doing so well financially given the very low mortgage default rates, that the U.S. Treasury is getting added revenue on the backs of responsible homeowners. If anything, the guaranteed fees are too high and should be reduced.
If Washington’s instinct is to eliminate Fannie and Freddie because of their past sins from past managers, then mortgages will be much more expensive with 30-year fixed rate products disappearing from the market place.
There will be active discussions on tax reform.
The goal would be to simplify.
Currently, the U.S. tax code is said to be thicker than the Bible – but without any of the good news.
In simplifying, there could be a trimming of the mortgage interest deduction, reducing property tax deduction and cutting of exemptions on capital gains from the sale of a home.
Moreover, for commercial real estate practitioners, the like-kind exchange tax deferral (also known in the industry as 1031) could easily be on the chopping block. Research has consistently shown how valuable these tax preferences are for homeownership, in protecting private property rights and for economic growth.
People in real estate and property owners across the country should therefore be on alert about any policy discussion on these matters.
Who knows how this will actually play out, but at the pace he plans to implement change, the picture should get a lot clearer next spring.
What do you think?
Share your thoughts in the comments section below.