Post-Election Market Watch

How do major events such as presidential elections affect your bottom line? Let's talk about Trump, market shifts to keep your eye on at the closing of the year-- and how both factors affect where you should focus your investment energy.

How Markets Behave After Elections

Historically, real estate can be a bit more sluggish in an election year, in part because of uncertainty on both sides about how the new administration's policies might affect the market. Home prices also rise more slowly the year of and the year after an election. In the short term, experts are predicting temporary surges in areas dominated by Trump's base, and uncertainty in heavily blue and privileged areas, primarily along the east and west coasts.

Trump Is A Wild Card

It's difficult for voters to get a read on how Trump's election is going to affect the housing market, simply because Trump himself hasn't had much to say about it. Says Nela Richardson, an economist at Redfin, “The next president will inherit the lowest homeownership rate in 48 years, and so far the voters have heard little to nothing about what the candidates will do to boost people’s chances of becoming homeowners." However, a few notable incidents have occurred in the weeks since the election, and we can also glean insights from policy matters Trump has mentioned.

A Treasury Spike

For starters, Trump is already affecting the housing market in unexpected ways. The election results coincided with a distinct spike in Treasury yields, the largest since what's known as the "taper tantrum," an incident that occurred in May and June of 2013. The taper tantrum led to a short-term spike in housing sales as buyers tried to get out in front of rising rates. Additional increases led to a housing slump. This new post-election incident, which the Wall Street Journal has dubbed the "Trump tantrum," has already raised mortgage rates by half a percent, to 4.02%. Refinances fell to a 6-month low last week, as well-- just as they did during the taper tantrum.

Trump's Infrastructure Plan

On the other hand, if Trump invests heavily in infrastructure, as he's currently claiming he will do, it may actually create or exacerbate housing shortages in certain markets. After all, huge, government-backed construction plans will draw skilled workers like moths to a flame, taking them away from private building and renovation projects. It may make materials harder to source, as well. At the same time, more jobs mean more home buyers, and the lower taxes Trump's proposing could leave potential homeowners feeling more bullish, as well. Certainly, Trump is hoping that job creation will drive demand in the real estate market.

Regulations Can Go

According to Trump, "Twenty-five percent of the cost of a home is due to regulation." He appears to be referencing a recent study conducted by the National Association of Home Builders (NAHB). While accurate, the statistic Trump's quoting refers specifically to the cost of new builds, not existing homes. The study does, however, demonstrate a disturbing $20,000 spike in per home cost since 2011. Most of the costs incurred relate to compliance with environmental regulations, including watershed protections and energy efficiency requirements. Trump would like to see environmental regulations scaled back. When it comes to the regulatory costs facing builders, he believes his administration can "get that down to about 2 percent." That would improve the bottom line for both builders and buyers.

Dismantling Dodd-Frank?

A key piece of legislation to watch is the Dodd-Frank Act. This regulatory act was drafted in the wake of the mortgage crisis and the Great Recession, to better protect homebuyers from predatory lending practices. Steve Mnuchin, the Goldman Sachs banker of IndyMac and OneWest fame, was recently tapped as Trump's new Treasury Secretary. Needless to say, he's not a fan of Dodd-Frank, and Trump has flatly stated a desire to dismantle it. Other close advisors, such as John Allison, who had been another contender for the top Treasury post, and Representative Jeb Hensarling (TX), the head of the House Financial Services Committee, are similarly disposed.

Small Banks Pumped Up

Others, however, theorize that Trump would limit changes to Dodd-Frank to loosening restrictions on small banks, a move that might ease lending difficulties for investors. It's certainly the most popular course of action, so much so that it might actually see bipartisan support. That's because the increased regulations ushered in by Dodd-Frank increase costs for small community banks; they've had to take on additional staff to wade through all the red tape. As a result, small banks are issuing fewer mortgages in general, and the sort of short turnaround mortgages preferred by investors have dried up considerably.

In contrast, the largest banks out there have only gotten larger, as they snap up the mortgages smaller banks can no longer handle. Barney Frank, one of the authors of the legislation, feels the mistake was in setting too low a cap for the new regulations. He believes this unfairly penalized banks that weren't responsible for the recession. According to Frank, the cap should have been set more than twice as high, and indexed, as well. It will be interesting to see whether Congress is able to come to terms on reforms, and whether it increases the credit available to investors.

Fannie and Freddie's Future

In addition to tracking market spikes, growth initiatives, and loosened regulations, keep an eye on Fannie Mae and Freddie Mac. These two companies, which currently reside in federal stewardship, back almost half of the mortgage market, and their stocks have surged since the election. This is because shareholders hope that the Trump administration will revert the two companies to private ownership. The government's continued involvement is a sore point. While the companies received a combined $187.4 billion dollars in federal bailout money, since they were restored to profitable organizations, they've paid $239 billion back into the Treasury...all as dividends. Stockholders are understandably unhappy. However, it's possible that privatization will involve dismantling both companies, and that could send shockwaves through the mortgage market, as well as greatly decreasing the number of 30 year, fixed rate mortgages available to traditional buyers. It's one train you'll definitely want to see coming.

Trump prides himself on being a maverick, and the result is a puzzle full of moving pieces. As his first 100 days unfold, watch his appointees and policies carefully, with an eye to the issues we've discussed. Don't party, and don't panic. You know your markets, and while they'll definitely be influenced by federal policies, there's no stopping the day-to-day business of buying and selling properties. So stay informed. Stay focused. Adapt.