Trump’s year in review on housing

President Trump has been in office for a little more than a year now. As such, we thought now would be a good time to look back on the actions his administration has taken during his first year in office that have affected housing here in California and across the nation.

Tax plan changes

Probably the biggest “win” for Trump’s presidency in 2017 was the passage of the 2018 Republican tax plan.

The changes were many, but the big headlines for housing include:

• nearly doubling the standard deduction, causing fewer people to itemize beginning in tax year 2018;
• limiting state and local (SALT) taxes to $10,000 per tax return;
• lowering the mortgage interest deduction (MID) from mortgage amounts of $1 million to $750,000;
• removing the deductibility from home equity loans (HELOCs) unless they HELOC is only used to fund home improvements;
• removing the deductibility of moving expenses except for members of the military; and
• doubling the threshold for the estate tax from $5.6 million to $11.2 million for individuals.

In California, the changes to SALT taxes and the MID will have the most tangible impacts for you and your real estate clients.

Since home values are so high here — after Hawaii, the highest in the nation — property tax amounts are likewise high. That means homeowners with large property tax (and state income tax) bills won’t be able to deduct as much off their income as in previous years.

California’s high home values also mean jumbo mortgages are more common, and so the lower ceiling on the MID will impact more than a few homeowners. This is especially true in California’s most costly coastal cities where million dollar homes are the norm (we’re looking at you, San Francisco).

In fact, one-third of U.S. homebuyers who answered a Redfin survey in late-2017 said they would consider moving to another state when tax reform passed. This great exodus is clearly not occurring, but it does indicate the stress the new tax rules will have on some homeowners’ wallets.

How will these tax changes impact the housing market in 2018 and the years following?

The new tax rules themselves will have little real impact on housing. That’s because demand for homes is rarely dictated by taxes. Rather, taxes are most often an afterthought of homebuyers.

CFPB shake-ups

One of the hallmarks of Trump’s agenda has been deregulation. The agendas of both Trump and the Republican Party include this item high on their list of market-boosting tactics.  In other words, those in charge believe the economy does better when there are fewer rules guiding the behavior of banks, lenders, appraisers and other major players.

Trump has stated time and again his intentions to either roll back or do away entirely with regulations put in place by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

One of the big players set up by Dodd-Frank is the Consumer Financial Protection Bureau (CFPB). This Bureau’s purpose is to:

• collect consumer complaints of financial fraud;
• educate consumers about major financial decisions;
• issue guidance and regulations for financial industries; and
• fine or otherwise prosecute financial institutions for practices that harm consumers.

Trump was finally able to make some major strides in pulling back the CFPB’s regulatory power in late-2017, when the former director resigned. Trump was able to appoint his own pick to oversee the CFPB and this new director is reviewing financial regulations and educational materials. Under Trump’s guidance, the CFPB is now most likely to begin rolling back regulations and consumer protections.

Related article:

CFPB takes first steps to rollback regulations

How is this likely to affect housing?

Looser consumer-financial protections means the housing and lending industries will start to look more like the old days — before the housing crash. Deregulation was the name of the game during the Millennium Boom when all a homebuyer needed was to walk into the nearest bank and be handed a zero-doc, zero-ability-to-pay mortgage. This activity added up to the default and foreclosure on hundreds of thousands of California homes.

Proactive agents can prepare by keeping watch for predatory lending and by encouraging homebuyer counseling, especially for first-time homebuyers who may be in over their head.

Recession on the way?

One thing Trump did not promise if he took office was a recession. And while a recession is never due to one person, it’s important to look ahead to the next recession, and prepare.

Looking at the broader financial health of the market, yields on the 10-year Treasury Note are escalating thus far in 2018. This means investors are demanding lower prices on the 10-year in return for higher rates. On the surface, this is a positive reflection on the market since investors are showing less demand for the safety of Treasuries and are instead investing their money in other, riskier instruments.

But since the government is now shelling out higher yields — interest rates — to draw investors, interest rates will also rise on other, non-government investment products. This includes fixed rate mortgages (FRMs) and adjustable rate mortgages (ARMs). For example, on February 1, 2018, interest rates averaged:

• 4.22% for the 30-year FRM rate, up from 3.95% a month earlier;
• 3.68% for the 15-year FRM rate, up from 3.38% a month earlier; and
• 3.53% for the 5/1 ARM rate, up from 3.45% a month earlier, according to Freddie Mac.

The 10-year Treasury Note is not the same thing as the Federal Reserve’s (the Fed’s) benchmark interest rate, the Federal Funds rate. This short-term rate is also on the rise in 2018, but unlike the 10-year, which is controlled by demand from bond market investors, the Federal Funds rate is directly controlled by the Fed. The Fed increases this benchmark rate to slow down the economy to prevent a bubble.

Higher interest rates, while reflective of current economic strength, also portend a future slowdown. In the housing market, higher interest rates reduce homebuyer purchasing power. This means mortgaged homebuyers are collectively unable to pay the same high prices that sellers have become accustomed to receiving.

The inevitable result is a slowdown in home sales volume and home prices.

Further, when the recession does take hold — likely around 2019 — Trump’s administration will be at the reigns to act. The good news is the coming recession will more than likely be more like a regular business recession than the last Great Recession of 2008. Factors which might alter the next recession include:

• any financial shocks due to the presently unstable stock market;
• a geopolitical crisis, such as war; and
• shifting Fed policy due to a new Fed chair.

This last factor really is a wild card, since Trump recently chose not to keep former Fed Chair Janet Yellen on at the Fed for a second term. She is the first Fed chair not to receive a second term since the 1970s, as Fed chairs tend to stick around even when new administrations move into the White House.

The new Fed Chair, Jerome Powell, lacks a background in Economics — another first for a Fed chair since the 1970s. However, his experience at the Fed makes him likely to continue Yellen’s gradual rate increases for now, but it’s unclear how he will respond to the next economic slowdown.

Agents: How have your clients reacted to rising interest rates? Is it slowing them down or are they undaunted? Share your experiences in the comments below.