Homebuilders euphoric over Donald Trump and prospects for 2017
Homebuilders believe less regulation and a stronger economy are in store thanks to the election of Donald Trump.
Despite being in California where an overwhelming majority of people are Democrats, homebuilders are mostly Republican in California and across the nation. Homebuilding is an entrepreneurial business that chafes at regulation, so it shouldn’t be terribly surprising to see so many Republican homebuilders. Since Donald Trump won the election, it’s also reasonable to expect homebuilder confidence would rise.
If Hillary Clinton had won, I don’t believe homebuilders would have been despondent, but they would have expected more of the same — increasing regulations and slow economic growth. When Trump surprised everyone and won the election, homebuilders were thrilled at the idea of a real estate entrepreneur running the country.
Since the election, everyone in the industry noticed changes in attitude and action among homebuilders. Most noticeable is the change in attitude among small homebuilders. Many were cautious about the future, but now full of hope, they are closing on deals and preparing to ramp up construction in 2017. Though correlation is not causation, in this instance, Trump winning the election made a difference.
Builders’ confidence in the future soared after the election, and despite the headwinds, builders are more confident than any time since the housing mania.
Builder confidence in the market for newly-built single-family homes jumped six points to a level of 71 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This is the highest reading since June 2005.
“Builders are buoyed by President Trump’s actions on regulatory reform, particularly his recent executive order to rescind or revise the waters of the U.S. rule that impacts permitting,” said NAHB Chairman Granger MacDonald, a home builder and developer from Kerrville, Texas.
While Trump’s order excited homebuilders, it accomplished nothing. When the reality of how little Trump can actually change things sets in, I expect homebuilder confidence to wane.
“While builders are clearly confident, we expect some moderation in the index moving forward,” said NAHB Chief Economist Robert Dietz. “Builders continue to face a number of challenges, including rising material prices, higher mortgage rates, and shortages of lots and labor.”
Rising mortgage rates will price out marginal buyers in 2017. For every 1% mortgage interest rates rise, it raises the cost of ownership by 11%, and as ownership costs rise faster than incomes, marginal buyers get priced out of the housing market and sales suffer.
Homebuilders are a surprisingly optimistic lot. Perhaps as entrepreneurs taking huge risks, they need optimism to remain sane and calm.
Why homebuilders like Donald Trump
First, Trump’s tax plan will shift housing demand from move-ups to entry-level. An increase in the personal exemption is a major tax cut for low-income and middle-income Americans because it reduces their taxable incomes by $18,400 per year. Increased disposable income will increase demand for low-end housing.
Second, Trump will lobby the Federal Reserve to allow the economy to run hot. Household income is a fundamental determinant of house prices. If more people find jobs, and if people earn more money, real estate should respond favorably both in volume and in price, which is particularly good news for homebuilding.
Third, Trump is one of them. Trump made his name and fortune in real estate. Builders and developers feel a kinship with him. Prior to his predilection for bombastic bullshit, Trump was widely admired by most in the industry. Whether he succeeds or not, most builders and developers believe Trump will try to work for them — much like the rest of his supporters.