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The Comfort of Opinion
John F. Kennedy once said, “Too often we enjoy the comfort of opinion without the discomfort of thought.” This quote rings true when you look at all the opinions circulating on the internet about a Trump Administration. Opinions range from euphoric to apocalyptic depending on whose political views you like to read. This article will not change your opinion one way or the other about Donald Trump. It’s not meant to. This article discusses the impact a Trump Administration will have on commercial real estate. Before I take a stab at that topic, let’s look at Trump’s economic thinking.
A Shift in Economic Thinking
Assuming Donald Trump governs like he campaigned, his economic ideology will be a major sea change in thinking for the Republican Party. It will no longer be the party of Ronald Reagan. Instead it will be characterized by:
- Decreasing globalization and free trade. NAFTA (the North American Free Trade Agreement) will be renegotiated. Participation in the TPP (the Trans-Pacific Partnership) will be withdrawn.
- Fiscal policies that have the potential to greatly stimulate the economy but also have the potential for huge budget deficits.
- The promotion of policies stimulating traditional domestic manufacturing above other sectors of the economy.
For the first time in our nation’s history we will have a real estate developer as president. It stands to reason that his proposed policies should be very good for commercial real estate.
Trump Team Needs Capable Negotiators
As of this writing, President-Elect Trump has yet to name his economic team. No one knows how much of his economic agenda he’ll be able to enact. Because of Senate rules, Democrats still have considerable influence. Consequently, how much legislation gets passed will require cooperating with the Democrats. He’s president, not king. So he cannot just decree that his policies be put into law. To succeed Trump will need to have people on his economic team that are capable legislators. They need to know how to negotiate well with the other side. If not, very little will get through the Senate. Let’s assume he is successful in getting his policies enacted. Shown below are three likely outcomes that will affect commercial real estate:
Dodd-Frank Regulations Eased
A concerted effort to limit some of the more draconian regulations of Dodd-Frank will happen. As you may recall this legislation was passed in response to the Wall Street abuses that caused the financial meltdown and precipitated the Great Recession. Many of these new regulations are necessary for protecting consumers from predatory lending practices. They should be left alone. But one of the unintended consequences of this law is that local and regional banks are at a disadvantage to the big national banks when it comes to complying with the new regulatory requirements. Leveling of the playing field needs to happen.
Fannie Mae & Freddie Mac Down-Sized or Eliminated
Trump has proposed doing away with these two government sponsored entities. At the very least he would like to shrink their size. And his thinking makes sense. It was during the Great Recession that residential loan defaults insured by these two financial institutions bankrupted both entities. The American taxpayer took a huge hit when Congress bailed them out. Both Fannie & Freddie are also major players in the financing of apartments. There isn’t a good reason why they should be in this market. Banks, life companies and credit unions could easily absorb their loan volume if Fannie & Freddie were no longer in business.
Mortgage Rates on the Rise?
Expect in the first 100 days of Trump’s presidency an economic stimulus bill that will be a combination of lowering personal and business tax rates and substantial government spending in the form of upgrading our nation’s infrastructure. Depending on whose estimates you believe, budget deficits are expected in the $1 to $3 trillion range over the next 10 years.
Growing budget deficits requires issuing more U.S. treasuries. Yields on treasuries are a function of supply and demand. If the supply increases (i.e. more debt) in order to increase the demand one of two things must happen:
- If The Federal Reserve allows the free market to work without interference, then yields on U.S. treasuries will rise to meet the supply. More supply requires higher yields to generate the needed demand. See related article: Why U.S. Treasury Rates will Continue to Decline.
- If The Federal Reserve interferes with the free market like it did during the Great Recession with quantitative easing and other similar policies, rates will remain artificially low. If they follow this course of action, which is likely, the U.S. will be on the same path as the European Central Bank and the Bank of Japan who now are the ultimate buyers of their country’s respective debt. This interference in the bond market can only end badly.
In summary, Trump policies will likely result in:
- Easing of government regulations
- Less government involvement in financing both residential and commercial real estate
- Lower personal and business tax rates
- Higher federal government spending on our nation’s infrastructure.
- Soaring budget deficits
Whether we have higher mortgage rates depends on how The Fed responds. Let us hope that The Fed has the wisdom to allow the free market to work without their interference.
One Last Thought About the Election
As one who didn’t vote for either major party candidate it’s depressing knowing your candidate for president is not going to win before a single vote is cast. Losing is painful. As we all know, one candidate won the popular vote by a sizeable margin and the other candidate won the Electoral College vote (the only vote that matters). Bottom line: Our country is as polarized politically as it’s ever been in our lifetime. It’s sad to see how divided we are. I have a couple of suggestions to heal our wounds:
- For those whose candidate won the election be gracious winners. Go out of you way to show empathy towards those who don’t share your political point of view; and,
- All of us need to be respectful of political opinions that differ from our own. Understand that you don’t have all the answers to life’s questions. Quit demonizing those who disagree with you. Their motivations are just as honorable as yours.
We all want what is best for our country. Regardless of whether your candidate won or lost we need to unite as Americans of all political persuasions. Some of us live in blue states and some of us live in red states but we all live in the United States of America.
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Sources: Donald Trump’s Contract with the American Voter, www.donaldjtrump.com/contract; How Trump’s Presidency Could Impact Real Estate, Lawrence Yun, Fobres, November 10, 2016; Real Estate, Opinions and the President, www.burtpolson/blog, November 11, 2016; President Trump’s Policies Will Likely Slow Economic Growth Over the Next 2 Years, Bill Conerly, Seeking Alpha, November 13, 2016; Reflections on the Trump Presidency, One Week after the Election, Ray Dalio, www.linkedin.com/pulse/reflections-trump-presidency-one-week-after-election-ray-dalio