The Politics of Homeownership 2.0: Post-Election

by Justin Porembo

Earlier this year I was approached about my opinion on the presidential election and the impact it would have on the real estate market. Since REALTORS® do not focus on donkey vs. elephant – instead, we focus on issues that affect the industry and homeowners – I was more concerned about the pending public policy that could be implemented by the winner of the presidential election. And, more importantly, I was concerned about how that pending policy could affect private property rights.

Before the election in November, our primary focus was on the president-elect’s stance on tax reform and, more specifically, the mortgage interest deduction that homeowners have come to rely on and is a needed incentive for many first-time homebuyers. Action from our new president can also impact the future of Fannie Mae and Freddie Mac and the status of reauthorizing the National Flood Insurance Program.

Tax Reform and Mortgage Interest Deduction

Mortgage interest deduction is an important part of homeownership as it allows taxpayers who own their homes to reduce their taxable income by the amount of interest paid on the loan, which is secured by their principal residence. The amount of deductible mortgage interest is reported each year by the homeowner’s mortgage company and is a key deduction offered as an incentive for homeowners. This deduction adds yet another benefit to being a homeowner and is a key factor on how the housing market impacts the economy. It is extremely important to have this deduction offered, as it puts consumers in a position where it is more beneficial to own a home than it is to rent a home. It is imperative to have this available to consumers and is a key benefit for all homeowners.
We are confident that President-Elect Donald Trump will have an active discussion on tax reform. The only question is: Will he simplify it or make it more restrictive?  In simplifying, there could be a trimming of the mortgage interest deduction, a reduction of property tax deduction, and a cut to exemptions on capital gains from the sale of a home.

For commercial real estate practitioners, the like-kind exchange tax deferral (also known as 1031) could easily be on the chopping block.

Research has consistently shown how valuable these tax preferences are for homeownership, in protecting private property rights, and for economic growth. People in real estate and property owners across the country should, therefore, be on alert for any policy discussion on these matters.

Commercial real estate depreciation is another tax code item to note with Trump, who has acknowledged that he used this depreciation to not pay taxes. For years, high-income professionals bought real estate at the recommendation of their tax advisors to lower their tax obligation. But in 1986, a new tax code prevented these “passive losses” of depreciation. It initially also tried to limit depreciation to real estate investors who are active in the real estate business. That would have been equivalent to not being able to depreciate expensive medical equipment by doctors in their business. That is why the National Association of REALTORS® (NAR) has made it known that depreciation should be allowed as an “active loss” for those who practice real estate as their profession. The current tax code makes this distinction and is unlikely to be on the chopping block in the tax reform discussion.

Fannie Mae and Freddie Mac

We don’t expect reorganization and reform of Fannie and Freddie to be a priority in the first two years of Trump’s term. However, he is known for being unpredictable. Our main objective is to begin the discussion with members of Congress about the importance of these lending entities.

National Flood Insurance Program

A top priority next year for REALTORS® will be reauthorizing the National Flood Insurance Program (NFIP), which is due to sunset in September 2017. The last time the program was reauthorized, a bill had already passed the House and Banking Committee. As of now, no bill on this program has been introduced in either the House or the Senate.  This issue is critical to the real estate industry, and a delay in reauthorizing the NFIP could cost the industry 40,000 lost home sales. NAR has testified twice on this issue and has a three-pronged approach to the issue: push for long-term reauthorization, attempt to address issues through FEMA regulations if possible, and urge states to authorize private flood insurance.

Donald Trump and Republican Control: How Will the Real Estate Market Fare?
Now, with all of that being said, the big question is: How will the real estate market be impacted by Donald Trump’s victory and with Republicans controlling both chambers of Congress? Even though Trump’s background is in construction and real estate, his policy platform has been largely vague.

According to many leading real estate experts and economists, many questions linger about a short or long-term stimulus to our economy from proposed tax cuts and government spending on upgrading the nation’s eroding infrastructure. Our GDP growth and higher interest rates will also plan into future tax revenue and the future of the national debt.

Many people have questioned how Trump’s victory will impact the stock market and how individuals will look to the future regarding investments and wealth management, all of which can impact the buying and selling of real estate. Decreased government oversight and regulation could make investors feel more comfortable, but Trump’s future actions with the Federal Reserve could impact the market in a negative way due to his unpredictability, and this could leave the financial market unsettled and hesitant to spend big.

Dodd-Frank Financial Regulation

Many perceive that a change to the Dodd-Frank financial regulation will occur in some form. A clear positive would be the lifting of compliance costs imposed on small-sized banks. Around 10,000 local and community banks have traditionally been the source of funding for construction and land development loans. With less regulatory burden, these small banks can make more loans and will boost home building activity, something that is needed in the current housing shortage situation. However, changes to financial regulations on large banks could again lead us back to the days of a market collapse.

Is Over-conservative Lending Here to Stay?

During Trump’s presidency, there could be a move away from stringent mortgage underwriting to more normal lending. Credit is still tight for mortgages as evidenced by very high credit scores among those who are getting approved. An important reason for overly-conservative lending is due to the exposure of random lawsuits by the government on lending institutions in recent years. To the degree that Trump makes it very clear as to what is and what is not an infraction, then more mortgages will be provided to consumers. Should the Trump Administration create an environment of, “we will sue you,” then the lending institutions will retrench and shut off mortgage access to many consumers.

New Construction

Regarding new construction, Trump could push for less regulatory land-use and zoning burdens, thereby lowering the cost of building. In recent years, newly constructed home prices have been much higher than existing home prices. Homebuilders say that is due to all the extra cost of regulation and not necessarily from material and labor costs. There have been discussions in the current Administration about lifting these burdens, and Trump will most likely attempt to address this issue, but jurisdictional issues of Federal versus local rules and regulations could be contested.

Several other issues are impacting the real estate industry, and we are curious to see how the Trump Administration will handle them. A few are the ever-increasing student debt many potential homebuyers face, how Trump’s immigration restrictions could impact home buying and the market as a whole, and the Environmental Protection Agency’s policies and regulations related to land use.

These are projections and thoughts from some of the leading minds in our industry, including Lawrence Yun, Chief Economist and Senior Vice President of research for the National Association of Realtors®. Our expertise, experience, and opinions may not be seen or heard by Trump’s inner circle, though. The future of our housing market and industry are much like our new leader – unpredictable.

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