Donald Trump will be sworn in as the 45th President of the United States on Jan. 20, 2017, with plans to fully “shake things up” on Capitol Hill. Whether he can pull that off remains to be seen.
No one really knows what the future holds, but we do have some clues that could help us prepare for the many changes to come. Here are some of Trump’s campaign proposals that, if enacted, could dramatically affect real estate over the next four years:
Trump has vowed to slash many of the regulations created during the Obama administration, including parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Critics say the 400 rules contained within 2,300 pages of Dodd-Frank has burdened small banks and allowed those “too big to fail” to dominate the industry.
Deregulating Dodd-Frank could bring more community banks and private lenders back into the mortgage lending business. This could increase liquidity and offer more alternative loan options outside Fannie and Freddie.
Deregulation could also bring more appraisers back into the industry. After the 2007-2009 housing crisis, many appraisers left the business because new regulations ate up nearly half their pay.
Here’s how President-elect Trump has proposed to shake up the tax code:
- A 35% tax cut for middle class families with two children.
- Cut seven tax brackets down to three. Currently the lowest tax bracket is 10 percent and the highest is 39.6 percent, plus 3.8 percent tax on high income earners to cover Obamacare. Trump is proposing just three brackets of 12 percent, 25 percent and 33 percent, with low-income earners paying 0 percent.
- Lower the corporate tax rate from 35 percent to 15 percent, including pass-through entities like LLCs.
- Allow deductions for childcare and elder care expenses.
- Repeal the federal estate and gift tax.
- Repeal Obamacare, with an intent to lower high-cost insurance premiums and remove the 3.8 percent Obamacare tax for high-income earners.
- Capital gains rates would stay the same (15 percent-20 percent) minus Obamacare tax.
How could these tax changes affect real estate?
Lower taxes would put more money in the pockets of the middle class and would likely stimulate the economy. It could help people save for a down payment or pay off debt that would help them qualify for a loan.
Lower taxes on the wealthy could encourage more second home/vacation home purchases and could boost sales in high-end real estate, which has been in a slump this past year.
Lowering the current corporate tax rate from 35 percent to 15 percent could be a game changer for real estate investors and business owners because he also included “pass-through” entities such as LLCs, S Corps and P’s. Many real estate investors hold their properties in an LLC.
As a trade-off, it’s possible that the 1031 exchange would be eliminated because paying taxes would not be as painful at a 15 percent rate. If you were hoping to do a 1031 exchange and defer your capital gains tax, this might be the year to do it.
Additionally, it’s possible that Trump’s tax plan would cap itemized deductions and limit all personal deductions, so if you have big expenditures coming, 2016 might be a better year for write-offs.
Trump’s proposed American Energy & Infrastructure Act could spur an estimated $1 trillion in infrastructure investment over 10 years. This would create more jobs and stimulate the economy. It would also create strong demand for housing in targeted metro areas where these funds are allocated.
For example, back in 2006, our company helped investors buy homes in Rockwall, Texas, where we knew a new freeway was slated to be built. New homes in the area cost around $145,000 at the time because it took an hour to get to Dallas. After the freeway was built, the commute time into town was cut in half, and property values doubled.
It will be important for real estate investors to pay close attention to where these funds will be allocated, as it could create strong demand for residential and commercial real estate in targeted metro areas.
Trade Deals and Inflation
The morning after the election, the stock market dropped but then reversed and shot back up, past its previous highs. The bond market tanked, as there were more people trying to sell bonds than there were willing to buy. Interest rates have climbed since. What happened?
After the initial shock of the election results subsided, investors quickly realized how opposite a Trump administration would be compared to Obama’s or Clinton’s.
Trump wants to rewrite trade deals, which would likely increase the cost of imports. This would create inflation. Additionally, he wants to bring jobs back to the U.S., which means paying higher salaries, and creating more inflation. The Fed would then need to raise rates to combat inflation.
Will interest rates continue to rise? And how will that affect real estate?
Interest Rate Hikes
If interest rates continue to rise, it doesn’t necessarily mean real estate will slow down. Back in the ’80s, interest rates were over 16 percent but home sales were also on the rise. Conversely, in 2009-2010, interest rates were at historic lows but real estate was in a slump.
Interest rates don’t have as strong an effect on real estate sales as job and salary growth. In other words, as long as someone can afford a property and the mortgage costs much less than rent, people will buy regardless of the interest rate.
With that said, there are markets where real estate prices are so high, the average person can no longer afford to buy. According to Trulia, a mortgage payment in San Francisco would take up 52 percent of a person’s income versus 27 percent in Florida.
Interest rate hikes could pop the real estate bubble in the highly inflated markets but would have little impact in affordable markets. That’s why owning property in areas where the average person can afford the average home or the average rent is a much safer bet.
Stock Market Volatility
Trump said the stock market is in a “big, fat ugly bubble.” Many experts believe it is at least 60 percent overvalued today, and Trump may be the only politician willing to let the air out of it.
If the Fed raises rates, it won’t be so easy for corporations to borrow cheap money to buy back their own stocks. Last December, when the Fed raised rates by a mere .25 percent for the first time in nearly a decade, the stock market tumbled by over 20 percent. We could expect the same thing to happen this year. And if it does, high end real estate could be affected.
Again, this is why owning real estate in affordable markets would not be as affected by stock market fluctuations.
Starting in January of 2017, the GOP will be in control of both the House and Senate. This could allow Trump to move forward on his proposals more easily, but it won’t be a slam dunk. A compromise will likely be needed to bring GOP fiscal conservatives who will want to see revenue plans to offset the tax reductions, and Senate Democrats who have the filibuster rule to prevent passage of tax bills with fewer than 60 votes.
The information available now about President-elect Trump’s tax proposals is based on campaign promises, but reality is a very different thing. More details will be revealed over the coming months, and we need to stay on top of it!
You can get daily updates on my podcast, Real Estate News for Investors, which you can find on iTunes, Stitcher or at www.RealWealthShow.com
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