The PFG AdminThe results are in, and the president-elect is ready for the office. What does round two of Trump mean for you and me? I am going to narrow in on a few of the main policies that would impact real estate investors from the Trump campaign. While this analysis assumes that Trump successfully implements these policy changes and that he gets the support needed to implement them. We won’t know for sure what changes we will see but it is smart to understand what might change and how it will impact us.
Tariffs
This is the most significant change Trump advocated firmly for during his campaign. He wants more tariffs! A tariff is a tax on another foreign country to import goods. Most countries have them and use them to raise money. In fact, many countries that the US ships goods to have much higher tariffs on us then we do on them.
Trump’s reasoning appears good, but it may backfire. He believes that by raising tariffs on other countries, the US will either benefit from higher revenue or force those countries to raise prices so high that US manufacturers will start producing products within our borders. This would create jobs and keep money circulating inside the US. However, the most likely outcome is less attractive: inflation.
If other countries can produce, ship, and pay the high tariffs while remaining cheaper than US production (which is very possible), the tariffs paid by other counties will be passed on to the consumer. If the US production becomes cheaper, which is Trump’s goal, prices would still increase, or we would already be producing those products domestically. Either way the prices go up. Also, if other countries retaliate and increase tariffs on us, our manufactures will be impacted. Near the end of the campaign Trump was threatening a 20% tariff across the board, while it is closer to 10% on most countries currently, with significantly higher proposed tariffs anywhere from 60% to 100% on China.
Immigration
The top two initiatives on Donald Trump’s official website are sealing the border and executing his mass deportation promise. While the policy’s foundation has merit, the implementation will be challenging and can have some negative impact on real estate investors.
First, to pull off the deportation plan, if we can call it that since there really is no plan, will have significant costs. The immigration court system is about 4 years behind as it is, and it is estimated that will balloon to over 16 years of back log under this plan. Additionally, the costs of finding and arresting the undocumented immigrants would require more government spending.
Aside from the money it will take to pull this off, think about what the reduced population will do and what type of work this population typically performs. Almost 40% of undocumented immigrants are from Mexico, and they often constitute a significant portion of construction crews. Immigration has historically helped reduce labor costs, which we can expect to increase if this workforce diminishes.
Like the tariffs, it is hard to say what will occur here. It is worth pointing out that during Trump’s first campaign, immigration was a hot topic, but Obama ultimately implemented more aggressive policies than Trump did.
Bottom line for investors is that this plan will likely create a higher labor cost and increase spending which will eventually lead to higher inflation.
Extend 2017 Tax Cuts
On January 1, 2018, the Tax Cuts and Jobs Act (TCJA) was signed into law by President Trump. It was an overhaul of the tax code with much of the cuts set to expire in 2025. Trump has floated many ideas on how he will reduce taxes, like no tax on tips for example, but the major and most clear part of his plan is the extension of expiring items in the TCJA. Some of the major cuts in the TCJA set to expire that currently benefit real estate investors include:
- Lower tax brackets benefiting all taxpayers
- Pass-through income deduction which benefits LLCs, partnerships, and S corporations
- A reduction in bonus depreciation which greatly benefits commercial investors
- Investment interest expense cap which benefits anyone who uses leverage in their business
Overall, the Trump victory will help real estate investors by keeping the current tax policies in place. It will, however, cost the country an estimated $8 trillion dollars over the next 10 years in lost tax revenue likely leading to increased money printing. Again, expect more inflation.
Release Fannie and Freddie
This is not something I heard a ton about during the campaign, but it is out there that Trump would like to make both Fannie Mae and Freddie Mac private for-profit entities again. During the 2008 financial crises, the government took control of these entities to keep them solvent and keep them purchasing mortgages. Because these two entities purchase most of the residential mortgages in this country, they are an important aspect of mortgage liquidity. They prop up demand for mortgages making it both easier to get loans and cheaper. If these entities return to private companies it will certainly have an impact to real estate investors. I see this going one of two ways. First it could benefit us because removing the government’s involvement could help reduce some of the fees that are charged by the government making it cheaper for us to borrow money. I have read some decent arguments for this. On the other hand, however, and what is more likely, is that the cost to borrow will increase. Shareholders will demand profits that the government does not necessarily need, which will encourage executives to run the operation for that purpose. For that reason, it is more likely that we would see fees and interest rates increase if Trump is successful with this plan.
Regulation
Trump has pledged to reduce construction-related regulations and broader business and energy sector restrictions. How and what regulation specifically is still a question. If he can reduce regulation that helps small business, we can all benefit and if there were less regulation around building, there would be more jobs and additional housing inventory. In general, less regulation will benefit real estate investors.
The primary concern with most of the proposed policies is the likelihood of higher inflation, which would eventually lead to increased interest rates. That is not something that will occur over night but over time I am confident that is the long-term impact of this election. Obviously, it is challenging to know how the Trump election will impact us because we don’t know what exactly will happen. I tried to leave my opinion out as much as possible and I only focused on the impact to real estate investors. There are positive and negative results to each issue and each issue will impact people in different ways.