As the political cycle ramps up, housing affordability might get some attention. And it’s more complex than you might think.
Obviously, housing policies have the potential to affect YOUR real estate investing … so it’s smart to pay attention.
Of course, there’s always risk in talking politics. Everyone has heroes and talking points. Sometimes it’s hard to take the filters off and consider all perspectives.
Fortunately, we’re not here to promote or protest a policy or a politician. Life’s too short for that.
Instead, our focus is on what people in power are thinking and doing … and how it affects our strategic investing.
In case you missed it, President Trump recently signed an Executive Order to take on the lack of affordable housing.
According to the announcement, the EO establishes a White House Council tasked with “tearing down red tape in order to build more affordable housing.”
This ONE sentence reveals much about how the President views the problem … and reflects his background in real estate.
So let’s put our red or blue foam fingers down and consider the landscape the way it’s being planted by the powers that be … and how things might change if a new sheriff comes to town.
Components of Affordability
Housing affordability is a relationship between incomes and mortgage payments or rents. It’s not about price as much as it is the gap between income and housing expense.
And the longer this goes on, the more people get pushed off the back of the affordability bus.
Ironically, it’s often the attempts at creating affordability which inadvertently makes things unaffordable. Will that happen this time?
Past national policy efforts focused on increasing the availability of financing, while many local efforts include legislating lower rents.
History shows easy financing actually makes housing more expensive … just like student loans made college more expensive.
This confounds typical politicians.
But it’s simple. Financing increases purchasing power … and newly empowered buyers bid prices up. Of course, sellers are happy to oblige.
Consider what happened to housing after the Clinton Administration lowered government lending standards in late 1999 …
Looser lending combined with the Fed’s then unusually low interest rates (trying to reflate stocks after the dotcom bust and 9/11 attacks) …
… drove real estate prices up, up, up in the early 2000s.
Everything was great until derivatives of those sub-prime mortgages imploded the bond market and crashed not only real estate prices, but the global economy.
So again … easy money doesn’t make things affordable. It inflates price bubbles which eventually collapse. Not a great plan.
Interestingly, President Trump is badgering the Fed to drop rates.
He says lower rates are necessary to keep the U.S. competitive in international trade … and to lower the interest expense of ballooning federal debt.
Some claim Trump’s trying to prop up the stock market heading into the election cycle, which is probably true.
In any case, based on this EO, Trump’s push for lower rates doesn’t appear to be intended to drive housing prices UP.
Of course, that doesn’t necessarily mean he wants to drive prices down either.
After all, there are many constituencies with vested interests in keeping values stable or growing.
Banks depend on property values to secure the mortgages they make.
Local governments depend on high values for property tax calculations.
And of course, property owners (who also happen to be voters), use high property values to feel rich or to tap into for additional purchasing power.
On the other hand, there are a growing number of disenfranchised voters who struggle with rising rents and are watching the dream of home ownership become more elusive.
When we asked then-candidate Donald Trump what a healthy housing market looked like in a Trump Administration, he simply said, “Jobs“.
Fast forward to today, and we know President Trump has been trying to re-organize the economy to produce more higher paying jobs.
Of course, the jury’s still out on whether he’ll succeed. But that’s the plan. And if he is successful, it will help close the housing affordability gap.
Of course, rising wages are useless if housing prices continue to outpace them … which brings us back to this affordable housing executive order.
When we put all this in a blender and hit puree, it seems to us crashing housing prices can’t be the goal.
Instead, we suspect the purpose of increasing supply is to moderate excessive price growth … while giving incomes a chance to catch up.
So on the housing supply side, President Trump’s Executive Order presumes to stimulate development by REDUCING regulation.
This is an unusual tactic for a politician. Politicians of both stripes are infamous for MORE government, not less.
Maybe Trump is still thinking like a real estate developer.
In any case, we visited the National Association of Home Builders website to see what active home builders think of the Trump approach.
They describe Trump’s EO as “a victory for NAHB” because “it cites the need to cut costly regulations that are hampering the production of more affordable housing…”
According to NAHB, regulations add SIGNIFICANT costs to development …
“… regulations account for nearly 25% of the price of building a single-family home and more than 30% of the cost of a typical multifamily development.”
Think about that. These are YUGE numbers. 😉
Of course, the odds of reducing regulations and their costs to absolute zero are … absolutely zero. There’ll always be some regulation.
But even if regulatory costs are substantially reduced, there are other factors to consider (we told you it was complex) …
Components of Cost
When bringing a real estate development to market costs include land, material, capital, labor, taxes, energy, and regulation.
Once built, you can tack on marketing, sales, and costs of operation until the product is sold or leased up. So, regulation is just one of many pieces of the equation.
Watching President Trump operate, it seems he attempts to manipulate components of cost as you’d expect from a typical real estate developer … making trade-offs to get things done in time and on budget.
The Opportunity Zones program is an attempt to move economic activity to where land is less expensive.
As mentioned, he’s aggressively calling for lower costs of capital (interest rates).
And the already passed Trump tax reform is delivering tremendous tax incentives for real estate investors.
And with his recent EO, Trump is going after costly regulation in the home building sector.
All that checks a lot of boxes.
Of course, there’s the issue of tariffs … which (at least temporarily) are adding to the cost of building materials.
(There’s much we could say on the touchy topic of tariffs … but we’ll save it for another day.)
Meanwhile, we’re chomping popcorn watching this play out … and trying to decipher what it means for Main Street real estate investors.
Here’s our bottom-line (so far) …
While interest and energy costs are macro-factors which affect the broad market, a reduction in federal regulation makes a smaller dent.
That’s because regulation is both a federal and regional phenomenon.
Our guess is markets with more local regulations will continue to attract less investment than those with less. Conversely, markets with less regulation will attract more.
This push to stimulate development is an obvious opportunity for real estate developers.
Meanwhile, we’re not staying up at night worrying about a supply glut collapsing housing prices any time soon.
If housing prices fall, it’ll probably be because credit markets collapse again.
For that reason, we continue to think it’s a good time to liquefy equity, lock in long term cheap financing, and tighten up operational expenses.
If prices do happen to fall … for whatever reason … as long as you have resilient cash flow and low fixed-rate financing you can ride out a storm as an owner.
And with some dry powder, a collapse isn’t a crisis for you … it’s an opportunity as a buyer.
Of course, you can stand at the plate all day waiting for the perfect pitch. Meanwhile, the market might continue to boom.
You can’t profit on a property you don’t own.
So even though there’s arguably some frailty in the financial system, it’s an ever-present threat you need to learn to live with and prepare for.
But as long as deals you’re doing today are structured to weather a storm, you’re probably better off collecting base hits than taking strikes.
Until next time … good investing!
More From The Real Estate Guys™…
- Check out all the great free info in our Special Reports library.
- Don’t miss an episode of The Real Estate Guys™ radio show. Subscribe on iTunes or Android or YouTube!
- Stay connected with The Real Estate Guys™ on Facebook, and our Feedback page.
The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.