Looking across the political and economic horizon, it’s tough to tell the fog from the clouds.
As some Americans woke up shocked to the news that Donald J Trump is President-Elect on November 9th, global markets went through turmoil not seen since the onset of the global financial crisis. Both the shock and turmoil are due to what has been perhaps the only consistent theme of President-Elect Trump’s campaign: unpredictability. As an ardent student of the housing market, I also see clouds on the horizon but it’s tough to decipher the clouds from the fog. If clouds are likely to build going forward, the consolation is that they are likely to be very different from the clouds that appeared during the start of the housing market crash ten years ago. Here’s my take on what I see ahead for housing during the Trump administration.
- The foreground looks rocky but predictable, and mortgage refinancing may rise. A rocky road is no fun to tread on, but at least we know where the obstacles lay. Uncertainty tends to drives investors towards safe bets, such as U.S. bonds, which pushes down mortgage rates and makes borrowing cheaper. This happened during Brexit as the world looked to a stable U.S. economy for safe harbor, but there’s an important difference between Brexit and a Trump victory: the US economy now looks less safe because we don’t know Trump’s policies towards trade. This is actually pushed bond yields higher this morning as investors hold off on purchasing U.S. bonds. At the same time, mortgage rates could stay low if investors are seeing safe yields in U.S. mortgage backed securities, reflecting the relative safety of the U.S. housing market. Furthermore, the Fed is likely to delay a December rate hike because of this uncertainty. Both effects could mean a short term win for borrowers, and we’ll likely see an increase in mortgage refinancing if rates fall. On the other hand, if investors pull out of mortgage backed securities and bonds, rates will likely rise. This could also spur refinancing as homeowners race to hedge against future rate increases.
- The middle ground looks foggy, blocking our view of the weather ahead. The shock of a Trump victory will be both a boon and drag on confidence of American homebuyers. Homebuyers in economically healthy blue states will likely be rattled and more hesitant about the future the US economy, which will curb their interest in making large investments. In economically stagnant red states, on the other hand, homebuyers will likely feel a surge of confidence that could bolster demand. Though these geographically polarized effects may help housing markets converge between the Costly Coasts and the Bargain Belt, the net effect on U.S. consumer demand for homes will remain unclear. If it’s negative, housing markets could take a severe long-term hit consumer confidence plunges, profits start to wane, employers cut back on hiring, and (gasp!) the U.S. dives into a recession. If it’s positive, we may see prices and rents in red-states catch up with blue-ones and an economy that grows more geographically even.
- Because of the fog, we can only rely on barometer readings. Perhaps most uncertain about a Trump presidency is what will happen to housing markets because of policy change. Trump hasn’t much discussed housing policy during his campaign, but he has hinted to “Make America Great Again” by boosting the homeownership rate through demand-side policies, such as financial deregulation, rather than through supply-side policies such as reducing local impediments to new supply. Like other markets, prices are likely to rise further if policies lopsidedly target demand without also addressing supply. In few other industries than housing is addressing supply equally as important as demand for mitigating affordability pressures, and we advise President-elect Trump to take a more balanced approach to the housing market as President Obama. Last, and perhaps more disturbingly, President-Elect Trump has hinted at defunding the Department of Housing and Urban Development, the primary arbiter of affordable housing policy at the federal level. While local and state policies are likely to be unaffected, major programs – such as the Low Income Housing Tax Credit and Section 8 housing vouchers – could be on the table for reform. Regardless if, or how, Trump reforms these programs, we hope he doesn’t lose sight of the millions of Americans who struggle to afford housing on a daily basis.
One final note: In late June we surveyed Americans about which candidate, Trump or Hillary Clinton would be better for housing. For what it’s worth, more Americans (39%) thought prices would rise under a Trump presidency than a Clinton one (29%). Perhaps more strikingly, millennials and younger voters, aged 18-34, were more likely to believe housing prices would rise under Trump vs. Clinton, by a margin of 49% to 26%.