President Trump and his Expected Effect on Real Estate

President Trump has been inaugurated and has immediately made his presence felt in several areas under the Federal Government's Jurisdiction, with changes to immigration policy, foreign policy, and trade policy happening all in his first week.  It remains unclear, at this time, how grand these effects might end up being, but in this post we will look at his historical and campaign directions towards real estate, and whether or not it might have an effect on the broader market.

 

President Trump and the expected effect on Interest Rates

The president has said several conflicting things about interest rates and the Fed generally during his campaign and post election.  His soon to be confirmed Treasury Secretary, Steven Mnuchin, was a little bit more forthcoming about rates and the dollar in general, saying that the U.S. wanted a "strong dollar" but not "too strong", and it was really strong. Not very helpful for the tea leaves!  

However, Federal Reserve Chairwoman Janet Yellen has been much clearer.  Interest Rates are going up.  Currently, Fed policy will be to move them up gradually, but that policy will be tested should the fires of inflation be stoked.  Ironically, the renewed optimism that seems to be spreading from the business community could result in increased spending and investment, and combined with a tighter labor market and rising wages could force the Fed's hand in moving rates up.  

President Trump, however, will likely be a spectator here, as the Fed Reserve is an independent body, and I do not think the Chairwoman or the other Fed presidents will be bothered much if the President exerts pressure to go in a direction they do not wish to.  Trump, certainly in a couple of years could -and probably will - find a new chairman, but whether that Chairperson is hawkish or dovish will probably depend on what economy is doing at that time. 

Prediction:Interest Rates move up .75% this year, 1%+ in 2018.  Trump effect: Negligible.

 

President Trump and Bank Policy and Mortgage Impacts

The second area where we can look for President Trump Administration impacts would be Bank Policy and Mortgage Policy, and other types of credit impacts.  Dodd-Frank, the recent set of laws that govern the lending industry, and largely have tightened up credit, making it harder to borrow, have been a frequent target for President Trump.  The laws themselves have been in place for sometime, and it will be easier for lawmakers to figure out which ones 'work" and which ones are "overkill".  Most of the candid assessments of Dodd-Frank that are out there feel that it does some positive things (like increase lenders risk when loans go bad) but also does some things which are really onerous (in particular, requiring lenders to make sure that they have done "everything" possible to qualify a loan, a ridiculous standard which won't change the risk pool very much).  I think that without question Dodd-Frank will be altered, and the credit cycle will loosen up.  This was likely to happen anyway, but will probably be accelerated under the Trump administration.  Don't worry, I don't expect we'll be going back to the "stupid-easy-credit" days of 2000-2005, but things will swing to a more neutral stance historically.

Dodd-Frank is not the only place that the Trump Administration can be expected to have an impact.  It was reported this week that the Federal Governments's Wells Fargo Whistle-blower page was taken down. If true, it is a strong indication that President Trump and his administration may choose not to examine or pursue what it deems minor infractions by the banks.  I think the Trump administration will be far less aggressive in pursuing legal action against banks and other lenders, and likely even other businesses.  And, I think it is fair to say, the previous administration had been far too willing to both punish and demonize the banking industry.  If the lenders spend less time looking over their shoulder - and spending less on fines and penalties - it is reasonable that those resources will go into the economy, and this could be a big positive for lending and the economy in general. 

As a sidebar, personally, I think it is bad practice to demonize any industry; things are rarely that simple where the whole industry is the issue (Witness the backlash as Hillary campaigned to "close down coal").  Banks in particular are doing an important job.  Yes, they were certainly at fault in the mortgage meltdown.  But many of the problems that led up to the meltdown were not of the banks' making, and they certainly didn't do it on purpose.  Were they greedy?  Undoubtedly.  Careless? In some cases. And they lacked foresight of how the reliance on short-term lending could start a chain of dominoes if confidence was lost. However, they were not alone in that.  Congress, the Fed Reserve, Financial Watchdogs, Fannie and Freddy - all who should have had things in place to sound the alarm - failed to do so, and should have been  - but were not - equally blamed.  Politically, it was far easier to blame the greedy bankers then to admit to the larger systemic issues which were allowed to fester.  Should the era of blaming business as the root cause of the country's issues end with the Trump Administration for a time, I, for one, will not be sorry to see it go.

 

President Trump and China Capital Flows

I'll close with a more complex issue.  Although it doesn't get a tremendous amount of press, a big part of the real estate recovery has been driven by Capital outflows from China.  Simplistically, if you live in China, it is difficult to own assets other than Chinese ones, but the desire to do so is great, both as protection from a society that is not free, and also as a hedge against the local currency.  Real estate is often seen as a safe haven, and the Chinese have been entering foreign markets everywhere and pushing up prices in Metropolitan areas.  This capital flight is not necessarily good for China, and so China has been increasing regulation to slow down and perhaps stop the outflow of money, and it has started to work.

Now where it gets complicated is how the Trump administration fits in.  Does the Chinese government seek to restrict just outflows to the US to hurt it?  Or perhaps they begin to sell the Trillions of bonds they have at their disposal, in order to drive up rates as part of a trade war tactic? Does President Trump exercise trade actions that have their own consequences with China?  In short, there are many ways this could play out, and I'm not convinced that the Trump administration truly understands the various levers that each has over the other - or more importantly, how those might play out on the grand stage.  For all the talk of how much China has hurt the U.S. economy, the truth is far more muddled, and I would think there is certainly risk that things could go down from where they are especially in real estate. To be sure, the Chinese are a significant effect on the markets, but I don't think withdrawing their stimulus would sink the market.  I do think it would slow things down considerably, but since things are overheated a bit, I'm not sure that's a bad thing at the moment.