By Hal Bundrick, CFP
Donald Trump, the real estate tycoon, will be our nation's 45th president. That's good news for the housing industry, right? Well, there's a lot to consider. Here's how the Trump presidency may impact housing and homeownership in 2017.
A 'responsibly aggressive' marketplace
A unified call for less government regulation is coming from the Trump camp as well as Republicans in Congress. On the deregulation radar: the Consumer Financial Protection Bureau and other elements of Dodd-Frank, the Wall Street reform act that President Obama signed into law in 2010.
"Since the elections, there has been much discussion of how expected changes under a Trump administration are likely to reduce the [CFPB's] impact, particularly in the enforcement arena," says Rob Chrisman, a senior advisor for the Stratmor Group, a mortgage industry consultancy. "Dodd-Frank will not be eliminated. It will be refined -- which is a good thing."
Jeff Taylor is managing partner of Digital Risk, a mortgage processing company. He also says trimming Dodd-Frank would be a good thing for potential homeowners.
"If Dodd-Frank is streamlined, I think you could have banks be more responsibly aggressive in the marketplace, as far as making mortgages," he says. "And I think that will open up more product for first-time homebuyers ... in the next couple of years."
Taylor says less stringent regulations on lenders might lower the costs of compliance and allow more small community banks to compete with big banks, "boosting bank profits -- all of which are likely to increase credit availability."
However, critics like Noah Smith, former assistant professor of finance at Stony Brook University, worry that deregulation will dial banking risk back up and, perhaps more importantly, put taxpayers back on the hook to bail out the bad actors. Just as during the housing crisis of 10 years ago, it would be another "race to the bottom," Smith wrote in a Bloomberg analysis.
But a reduction in federal regulations won't transform the housing industry, Chrisman says. "Trump may mean less federal enforcement, but the states will remain aggressive. Politicians in California, Illinois and New York, primarily Democratic states, have already mentioned a stepped-up regulatory atmosphere," he says.
Getting Fannie and Freddie 'out of government ownership'
Another item on the Republican agenda is to reduce the government footprint in the mortgage industry. That means moving Fannie Mae and Freddie Mac into the private sector.
The two government-sponsored companies back a majority of mortgages and were bailed out with taxpayer dollars during the housing crash. Fannie and Freddie buy home loans from lenders and then package and sell those loans in large bundles of bonds.
The quarterly profits that Fannie and Freddie earn are now funneled to the U.S. Treasury, which has been paid back $60 billion more than it provided in bailout funding to the companies. Investors in Fannie and Freddie want to see that money move back into the private sector.
In November, Trump's Treasury secretary nominee, Steven Mnuchin, told Fox Business Network, "We gotta get Fannie and Freddie out of government ownership."
"I think there are models that could work," Taylor says regarding Fannie and Freddie privatization. "What I don't think you could see is a model [where] the U.S. government doesn't stand 100% explicitly behind the bonds that Fannie and Freddie issue."
He says removing that federal guarantee would reduce the global demand for the mortgage-backed securities that the two quasi-government agencies issue. Those bonds are instrumental in freeing up capital for lenders to make more loans.
Homebuilders and a Trump economy
A lack of skilled labor has been one of the biggest constraints to the housing industry for the past couple of years, and Taylor worries that the Trump administration may not help matters in that regard.
"Mr. Trump's plan to spend money on infrastructure projects around the country could result in more laborers taking those jobs and leaving homebuilders short-handed," Taylor says. "Also, his immigration stance is likely to keep immigrants out of the country and out of the workforce -- a blow to homebuilders who rely on immigrants for many construction jobs."
Labor shortages also contribute to rising wages for construction workers, which in turn keep new home prices high, he adds.
However, Robert Dietz, chief economist for the National Association of Home Builders, says he expects the Trump administration to take action on some labor rules that could benefit the homebuilding industry. That will almost certainly include the Obama overtime rule "that would've affected a lot of construction site managers," Dietz says.
That rule, blocked by a federal judge on Nov. 22, aimed to double the maximum income a worker could earn and still be eligible for mandatory overtime pay. The new limit of $47,500 would have given 4.2 million more Americans the opportunity to earn overtime, according to the Obama administration.
Dietz also is looking for a Trump administration to help lower building costs. "Just under 25% of the cost of a newly built home is due to regulatory burdens," he says. "I think it's reasonable that the new administration can address a lot of them."
How Trump might affect home affordability
Mortgage rates have soared since Trump won the election. That's part of a good news/bad news scenario.
"One could argue that the Trump victory has driven up interest rates due to the fear of future inflation, given his tax and infrastructure build proposals," Chrisman says. "This increase in rates certainly negatively impacts homeownership for first-time buyers. Increasing interest rates, however, often signal a strengthening economy, and if that is the case, more first-time borrowers will qualify."
Taylor also says home affordability could suffer but offers another factor in the equation. "On the positive side, [higher mortgage rates] could also slow price appreciation, which would help buyers. The housing market has lacked first-time buyers and move-up buyers. Slower price appreciation could benefit move-up buyers who have regained value in their home and want to move up before prices rise again," he says.
"I'll tell you, if I'm looking to buy a house for the first time or to sell my house and move into a different house, I really am looking at this next year as probably a moving year because rates still in the 4s are very, very attractive," Taylor adds.
Will Trump eliminate the mortgage interest deduction?
And then there's the most sacred cow of all: the mortgage interest deduction. It is frequently mentioned as an important factor in the "buy or rent?" conversation.
The Trump administration and Republicans have floated the idea of putting a cap on the amount of allowed interest that you could deduct from your tax bill.
The thing is, an analysis by the Tax Policy Center of the Urban Institute and Brookings Institution says only about one-fifth of households actually use the deduction. And of those that do, most are way above middle-class taxpayers.
"The Tax Policy Center finds that in 2017, Trump's cap would affect only about 160,000 singles, a tiny fraction of the 89 million single taxpayers, and about 230,000 couples out of 59 million joint filers," Howard Gleckman, senior fellow with the Tax Policy Center, writes on Forbes.com. "The vast majority of the taxpayers who would face the cap are high-income."
Homeownership rates under a Trump presidency
Chrisman is looking for little change in the rate of homeownership in the coming years. From a percentage perspective, homeownership in the U.S. reached its peak during the Clinton/Bush presidential terms, he says. But that's when banks relaxed underwriting guidelines to such an extent that "people who shouldn't have been buying houses were."
The housing crash changed everything. Underwriting, loan documentation and appraisal requirements have strengthened since then. "Marginal borrowers are not borrowing money, and investors feel more secure with investing in mortgage-backed securities," Chrisman says.
He says that America's need for housing is just as great as ever and that Trump's policies won't move the dial on homeownership rates one way or the other.
"Internal population growth hasn't stopped, nor has immigration. Nor has the desire for a new generation to want a home for their children," he says. "I think that from what we know so far, the Trump presidency will have little or no direct impact on homeownership rates."
A positive outlook for the New Year
All in all, the experts we spoke with are optimistic about 2017. Lenders are using better technology to streamline the mortgage process, and the housing market is "healthy" and "robust," in their words.
"Builders are excited," Dietz says. He says reductions in regulatory costs could help homebuilders provide housing to the tightest segment of the market, the entry-level buyer.
"If we do get an administration that's taking a look at various kinds of regulatory policies -- where they've grown too large or too expensive -- that will certainly be a help [to] the supply side of the market. And I think that's good news, not just for builders, but it's good news for renters and prospective homebuyers because adding supply is the way that you address housing affordability issues."
Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email: email@example.com. Twitter: @halmbundrick.