By Oren Jacobson, Market Analyst - New Home Star
Shortly after the election, I wrote a Star Article trying to project the impact of the Trump Presidency on the housing market. This article serves as an update to that article now that we are roughly five months into the administration. Much of the general commentary previously provided holds true. However, we can amend some things based on process, timing, and momentum on various issues and economic trends.
When we look back at the Trump administration, we may very well point to the decision to pursue healthcare before infrastructure as a major strategic error. Despite signals from leading members of the Democratic Party that they would work with Trump in this area, the administration went toward a much more divisive topic. There were two main reasons why they did this. First, the GOP felt like it had to keep a promise to its base. Second, they planned to do a major tax reform and hoped to use the savings (almost $1 trillion) from repealing the ACA to offset the lost revenue from such tax reform.
The net effect of this on housing is that after five months in we haven’t seen any major progress on infrastructure and, frankly, it appears to not be in the cards for 2017. What does that mean? It means a major stimulus many were hoping for is, at best, delayed. 2018 is an election year, which means that a largely significant bill on infrastructure may be harder to reach as Democrats have less incentive to work with Trump. This is especially true in light of recent events, and conservatives in his very own party balk at the price tag and deficit/debt impacts. Tax reform is just starting to be worked on in a serious way, but that process will also take us through the fall, and potentially into early next year.
What does that mean? Simply, the two major boosts Trump wanted to give to the American economic engine will have no impact on 2017’s market. My expectation is that you will continue to see positive momentum and growth in 2017 at a relatively constant and familiar pace. Let’s be honest, there’s nothing wrong with predictable steady growth, even if it’s moderate. Sometimes moderate growth is better for many firms as they aren’t able to scale fast enough and maintain operational integrity through a more dramatic growth.
If Trump is to ultimately succeed on both infrastructure and tax reform, it’s critical to understand how and when those funds would begin to impact the economy. Tax reform would have a far more immediate impact as people start to see differences in their take-home pay, though who would benefit and to what level is hard to say right now. Regardless, the expectation is that there will be lower taxes, thus more discretionary income and increased demand in the economy. Infrastructure will take longer for its effects to hit the economy, though, as the distribution of funds there is tied toward projects which will take time to get off the ground.
If these two things pass in late 2017 or early 2018, we should anticipate a stimulative effect on the economy and larger growth numbers in the industry. Nevertheless, it’s worth noting that infrastructure spending could have some negative impacts on labor and costs in housing. If we are near full employment, which the FED believes we are, there is also the possibility that the combination of tax cuts and stimulus spending will overheat the economy, driving demand up and thus inflation, forcing the FED to raise rates, and lead to some recessionary effects. Interest rates could creep up toward 6% as we move toward the end of 2018 or into 2019 as a result. Remember, the FED aims to maintain a roughly 2% inflation rate.
All of these moving pieces are mostly hypothetical, but form the foundation of the general expectation that 2017 stays on pace as a good year in housing and all signs point that this trend will continue in 2018. The downside risks of Trump’s plans aren't likely to create too many challenges during that time and the efforts to deregulate banking, which carries some obvious risks but would also make lending easier, have already begun.
The only real concrete policy that has had any effect on the housing market so far is the Trump's administration’s decision to place a tariff on Canadian lumber. The estimates are that the impact of this tariff will drive up the cost of a new home by roughly $3,600 on average across the country as commodity prices adjust. This may help the bottom line of some American lumber producers, and potentially help improve wages for their employees if they share those gains. The flip side is that it will also hurt American consumers looking to buy new homes by both driving up the price and by potentially crowding folks out at the fringes.
Oren Jacobson holds an MBA with an emphasis in strategic management and a Masters in Economics and Policy Analysis. As the lead strategic marketing analyst for New Home Star, Jacobson specializes in helping builders maximize their asset positioning through market segmentation, consumer alignment, and data analysis. He also leads the NHS team in the creation of training tools and resources to develop and enhance their expertise in sales.