Is Trump a Negative for the Housing Market?

TheStreet.com quoted me in Is Trump a Negative for the Housing Market? It opens,

At first blush, real estate industry professionals saw a lot to like with the election of Donald Trump to the presidency. Trump was and is pro-business, and he made his billions in the commercial real estate sector. This, real estate pro’s thought, is a guy who has the industry’s back.

But not every real estate specialist views the Trump presidency as a net positive.

Take Tommy Sowers, from GoldenKey, a real estate technology platform with locations in San Francisco and Durham, N.C.

Sowers holds a “strong belief” that President Donald Trump will actually be detrimental for the real estate industry, making it less affordable for Americans to buy homes.

“During the campaign, Donald Trump spoke about home ownership numbers being the lowest they have ever been since 1965 at 62.9%,” says Sowers. In a nation where homeownership is seen as synonymous with the American dream, it’s no surprise that he wanted to highlight this low rate and suggest ways to increase it, he says. “The reality is that his policies and actions indicate the opposite,” he says.

Sowers lists several reasons why Trump may not be the industry savior some real estate professionals might have counted on:

Rising interest rates – “While this responsibility sits with the Federal Reserve, which has kept interest rates low in recent years, Trump has blasted them for doing this stating that they are ‘creating a false economy,'” Sowers explains. “Most economists predict that interest rates will now rise in 2017.”

Dismantling Government Sponsored Enterprises (GSEs) – “During the 2008 financial crisis, the taxpayer bought out Fannie Mae and Freddie Mac and now under government control they play a greater role than before the crisis in sustaining real estate sales and providing liquidity to the housing market,” Sowers says. “Trump wants to privatize them – a shake up to this arrangement could mean that banks stop offering the lower cost 30-year fixed rate mortgages.”

Cutting FHA home insurance – This was one of Trump’s first acts in office, making it more expensive for borrowers to insure their homes, Sowers notes. “His pick for Treasury Secretary, Steve Mnuchin, wants to limit the mortgage interest deduction,” he adds. “This may not impact the average US homebuyer but in many areas across the country the average home is above the threshold of $500,000.”

Immigrant confidence – “We are a nation of immigrants and many are here legally with green cards,” Sowers states. “His latest immigration policy has sent shock waves to foreign investors and will likely stunt confidence in immigrants that are here legally from buying a home.” President Trump has said he hopes to encourage further building with the National Association of Home Builders, he adds. “However, with so many immigrants working in the construction industry, his policies are likely decrease the speed of development,” Sowers says. “With less new homes being built, people are likely to wait and not move or buy a new house.”

There are other areas of concern, experts say. For example, reducing government regulations may thrill real estate professionals, along with buyers and sellers, but industry experts say that will actually hurt the U.S. housing market.

“Trump’s commitment to weakening the Consumer Financial Protection Bureau and the consumer protection provisions of the Dodd-Frank Act will have a harmful impact on the housing market in the long run,” predicts David Reiss, a law professor at the Brooklyn Law School, in Brooklyn, N.Y.

Reiss says Trump and his allies argue that Dodd-Frank has cut off credit, but the numbers don’t bear that out. “Mortgage rates are near their all-time lows,” he says. “Dodd-Frank, which created the CFPB and mandated the Qualified Mortgage and Ability-to-Repay rules, put a brake on most of the predatory behavior that characterized the mortgage market before the financial crisis. Getting rid of Dodd-Frank and the CFPB may loosen mortgage lending a bit in the short term, but in the long term it will allow predatory lenders to return to the mortgage market, big-time.”

“We will the see bigger booms followed by bigger busts,” he adds. “That kind of volatility is not good for the housing market in the long term.”

State of the Nation’s Housing Finance

The Joint Center for Housing Studies of Harvard University has released the 2014 edition of The State of the Nation’s Housing. As to the nation’s housing finance system, the report finds that

The government still had an outsized footprint in the mortgage market in 2013, purchasing or guaranteeing 80.3 percent of all mortgages originated. The FHA/VA share of first liens, at 19.7 percent, was well above the average 6.1 percent share in 2002–03, let alone the 3.2 percent share at the market peak in 2005–06. Origination shares of Fannie Mae and Freddie Mac were also higher than before the mortgage market crisis, but less so than that of FHA. According to the Urban Institute’s Housing Finance Policy Center, the GSEs purchased or guaranteed 61 percent of originations in 2012 and 2013, up from 49 percent in 2002 and 2003.

Portfolio lending, however, has begun to bounce back, rising 8 percentage points from post-crisis lows and accounting for 19 percent of originations last year. While improving, this share is far from the nearly 30 percent a decade earlier. In contrast, private-label securitizations have been stuck below 1 percent of originations since 2008. Continued healing in the housing market and further clarity in the regulatory environment should set the stage for further increases in private market activity. (11)

As usual, this report is chock full of good information about the single-family and multi-family sectors. I did find that some of its characterizations of the housing market were lacking. For instance, the report states

Many factors have played a role in the sluggish recovery of the home purchase loan market in recent years, including falling household incomes and uncertainty about the direction of the economy and home prices. But the limited availability of mortgage credit for borrowers with less than stellar credit has also contributed. According to information from CoreLogic, home purchase lending to borrowers with credit scores below 620 all but ended after 2009. Since then, access to credit among borrowers with scores in the 620–659 range has become increasingly constrained, with their share of loans falling by 6 percentage points. At the same time, the share of home purchase loans to borrowers with scores above 740 rose by 8 percentage points.

Meanwhile, the government sponsored enterprises (GSEs) have also concentrated both their purchase and refinancing activity on applicants with higher credit scores. At Fannie Mae, only 15 percent of loans acquired in 2013 were to borrowers with credit scores below 700—a dramatic drop from the 35 percent share averaged in 2001–04. Moreover, just 2 percent of originations were to borrowers with credit scores below 620. The percentage of Freddie Mac lending to this group has remained negligible.

Yet another drag on the mortgage market recovery is the high cost of credit. For borrowers who are able to access credit, loan costs have increased steadily. To start, interest rates climbed from 3.35 percent at the end of 2012 to 4.46 percent at the end of 2013. This increase was tempered somewhat by a slight retreat in early 2014. In addition, the GSEs and FHA raised the fees required to insure their loans after the mortgage market meltdown, and many of these charges remain in place or have risen. The average guarantee fee charged by Fannie Mae and Freddie Mac jumped from 22 basis points in 2009 to 38 basis points in 2012. In 2008, the GSEs also introduced loan level price adjustments (LLPAs) or additional upfront fees paid by lenders based on loan-to-value (LTV) ratios, credit scores, and other risk factors. LLPAs total up to 3.25 percent of the loan value for riskier borrowers and are paid for through higher interest rates on their loans. (20)

Implicit in this analysis is the view that lending should return in some way to its pre-bust levels. But, in fact, much of the boom lending was unsustainable for many borrowers. The analysis fails to identify the importance of promoting sustainable homeownership and instead relies on one dimensional metrics like credit denials for those with low credit scores. Until we are confident that borrowers with those scores can sustain homeownership in large numbers, we should not be so quick to bemoan credit constraints for people with a history of losing their homes to foreclosure.

The Center’s analysis also takes a simplistic view about guarantee fees.  The relevant metric is not the absolute size of the g-fee. Rather, the issue should be whether the g-fee level achieves its goals. At a minimum, those goals include appropriately measuring the risk of having to make good on the guarantee.

Finally, the Center demonstrates symptoms of historical amnesia when it characterizes an interest rate of 4.46% as “high.” This is an incredibly low rate of interest and one would expect that rates would rise as we exit from the bust years.

I have made the point before that the Center’s work seems to reflect the views of its funders. The funders of this report (not identified in the report by the way) include the National Association of Home Builders; National Association of Realtors; National Housing Conference; National Multifamily Housing Council; and a whole host of lenders, builders and companies in related fields that make up the Center’s Policy Advisory Board. These organizations benefit from a growing housing sector. This report seems to reflect an unthinking pro-growth perspective. It would have benefited from a parallel focus on sustainable homeownership.