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Trump's Immigration Policy Could Slam Real Estate Market Lombardi Letter 2017-11-28 02:40:20 real estate market forecast for 2017 housing market prediction trump’s immigration policies real estate market analysis housing bubble will the real estate market crash again will the real estate market crash in 2017 stock market crash The real estate market forecast for 2017 is troubling, if recent trends are any indication. Trump's immigration policies could foreshadow disorder ahead. News,U.S. Economy https://www.lombardiletter.com/wp-content/uploads/2017/02/Real-estate-marke-forecast-150x150.jpg

Trump’s Immigration Policy Could Slam Real Estate Market

News - By Benjamin A. Smith |
Real estate marke forecast

America’s Residential Real Estate Market Forecast Could Be in for a Bumpy Ride in 2017

The real estate market forecast for 2017 is a troubling one, if recent trends are any indication. It seems Trump’s immigration policies, coupled with rising rates, are roiling the markets, perhaps foreshadowing amplified disorder ahead.

The most obvious correlation involves basic supply and demand. If fewer immigrants call America home, due to increased deportations and more stringent barriers to entry, overall demand for property will decrease. Studies suggest new arrivals can account for up to one third of new homeowners in the United States; more in border States like Texas and Arizona.

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We see early stages of the phenomenon playing out today.

Various national media outlets are reporting anecdotal evidence Trump’s immigration policies are having a dampening effect on housing demand. Bloomberg reports that immigrants, legal or otherwise, are no longer feeling the “optimism” needed to make a such a life-altering decision. “I feel like with one stroke of Trump’s signature everything can be taken away, even all my hard work.” (Source: “Why Trump’s Immigration Crackdown Could Sink U.S. Home Prices,” Bloomberg, February 22, 2017.)

A negative housing market prediction doesn’t rest on the laurels of one cherry-picked comment in a Bloomberg article. But it does underscore the palpable fragility immigrants are feeling towards some of the Trump administration’s policies. As home buying purchases are as much an emotional decision as they are financial one, it’s easy to project how insecurity in these communities could spill over to wider consumer disarray.

Leading credence to this thesis, some consumer lenders are starting to get nervous. Las Vegas-based Alterra Home Loans is “proceeding cautiously” when it comes to dishing out new home loans. Mortgage lenders are particularly vulnerable to defaults early on in the loan cycle, and some smaller firms will actually lend to undocumented workers making them sensitive to deportation risk. (Source: Ibid.)

So what is the panic behind this real estate market analysis? In short, it’s Trump aggressive deportation orders and signaling of such.

The Trump administration announced a concerted crackdown on undocumented immigrants. The goal is to swiftly deport certain immigrant groups without court hearings. Department of Homeland Security Secretary John Kelly clarified the plan stating: “no longer will exempt classes or categories of removable aliens from potential enforcement.” He further encouraged immigration officials to deport undocumented people “willful misrepresentation in connection with any official matter before a governmental agency” or have “abused” any government benefit.” (Source: “Trump Team Maps Sweeping Deportations for Undocumented Migrants,” Bloomberg, February 21, 2017.)

Whatever side off the immigration debate you fall on, it’s undeniable this is bearish for the residential real estate market forecast. How can non-U.S. citizen make a life-altering decision under such inauspicious circumstances? Doubly so because of Trump’s knack for malleable policies. Instability breeds unpredictability, and those are two huge disincentives for people looking to make the ultimate big ticket purchase.

This recent development comes on the heels of Trump’s supposed “Muslim Ban,” which barred entry to citizens of seven majority Muslim countries in January for 90 days. Refugees were also suspended from entering for 120 days.

This was clear virtue signaling that the unfettered immigration flowing endlessly since the 1980s was poised to slow down—drastically. It’s clear to everyone by now, Trump means business on immigration.

Will the Real Estate Market Crash Again?

Signs are pointing to this possibly, and investors are becoming more concerned about it. Unlike 2008, there isn’t one single factor which could torpedo the market, rather, several ones. If several factors align just right, the real estate market forecast could be in for a rude awakening.

Let’s start with the increase in the bond market rates in recent times. The big rally in the 10-Year Treasury note since August 2016—from 1.32% to 2.375% (current)—is making consumer financing more expensive for a credit-addicted society. This is leading to higher mortgage payments on all sorts of items where consumer credit is used most: mortgages, car loans, HELOC’s and credit cards. With stagnant incomes and low return on deposits, average Americans are deeply sensitive to even small changes in interest rates. Most of mainstreet has not benefited substantially from the multi-year rally in equities, nor have they participated greatly in Obama’s (mainly) faux recovery.

We have seen evidence of higher rates hurting mortgage applications volume at the end of 2016. This figure fell a whopping 12% in December’s final week, and mortgage refinance applications fell 22% for the two week’s ending in late December, according to the mortgage Bankers Association. “…As mortgage rates continued their upward climb… overall application volume fell even more than the holiday slowdown would suggest,” said Michael Fratantoni, chief economist for the MBA. (Source: “Mortgage applications tank 12% to end 2016,” CNBC, January 3, 2017.)

U.S. MBA Mortgage Applications (Week-over-Week)

Release Date Actual Previous
Feb 22, 2017 -2.0%  -3.7%
Feb 15, 2017 -3.7% 2.3%
Feb 08, 2017 2.3% -3.2%
Feb 01, 2017 -3.2% 4.0%
Jan 25, 2017 4.0% 0.8%
Jan 18, 2017 0.8% 5.8%
Jan 11, 2017 5.8% 0.1%
Jan 04, 2017 0.1% 2.5%
Dec 21, 2016 2.5% -4.0%
Dec 14, 2016 -4.0% -0.7%
Dec 07, 2016 -0.7% -9.4%
Nov 30, 2016 -9.4%* 5.5%
Nov 23, 2016 5.5% -9.2%
Nov 16, 2016 -9.2%** -1.2%
Nov 09, 2016 -1.2% -1.2%
Nov 02, 2016 -1.2% -4.1%
Oct 26, 2016 -4.1% 0.6%
Oct 19, 2016 0.6% -6.0%
Oct 12, 2016 -6.0% 2.9%
Oct 05, 2016 2.9% -0.7%
Sep 28, 2016 -0.7% -7.3%
Sep 21, 2016 -7.3% 4.2%
Sep 14, 2016 4.2% 0.9%
Sep 07, 2016 0.9% 2.8%
Aug 31, 2016 2.8% -2.1%
Aug 24, 2016 -2.1% -4.0%
*Represents the third lowest week-over-week decline in 2016
**Represents the fourth lowest week-over week decline in 2016
(Source: “U.S. Mortgage Applications WoW,” Investing.com, February 22, 2017.)

As we can see from the above chart, two of the poorest results in 2016 U.S. Mortgage application rates have occurred immediately following the election victory of Donald Trump. Coincidence? Perhaps. It could be more representative in the fact that interest rates had been rising for several months leading up to Donald Trump’s election win, hovering near two-year highs since his victory. But it does make us wonder how much political angst played a factor in the clear drop in applications.

With mortgage applications and refinances meaningfully impaired at 2.6% rates, just imagine the impact on credit applications if rates normalized closer to its historical mean average of 6.3%. This could happen according to legendary bond manager (a.k.a. The “Bond King”) Bill Gross, who has sounded the alarm bond yields could spike if a nearby threshold is breached. “If 2.6 percent is broken on the upside … a secular bear bond market has begun,” (Source: “Bill Gross: 2.6% 10-year yield is the key to everything this year,” CNBC, January 10, 2017.)

So while degradation in interest rates and sentiments are problematic enough, investors must also worry about a possible negative “wealth effect” influence on prices should the stock market crash. There’s no question equity valuations are stretched from a historical perspective. Investors only have to look as far popular valuation gauges such as the CAPE ratio, price/sales, price/book, Q-ratio, dividend yields etc. to see this is so. Every single one of these metrics is trading 80% or more above the past century’s bull market peaks. (Source: “Opinion: Here’s how you know the stock market is hugely overvalued,” MarketWatch, August 16, 2016.)

A significantly overdue (deep) correction in equity prices could pressure the mid to high-end real estate market forecast (the people wealthy enough to possess investment portfolios) just as the immigrant class was contracting. This, in effect, could produce a double-whammy effect for real estate prices throughout the spectrum. After all, many high-end individual rental property investors depend on “wealth effect” factors in their investment and real estate portfolios when deciding whether to purchase additional rental homes or cottages.

Also, keep in mind that subprime lending is back for many consumers on the margin. You might recall subprime lending was a primary factor for the overheated residential property bubble in the early 2000’s and subsequent U.S. housing market crash in 2008. It appears originations of FHA-backed mortgages were up 54% in September 2016 from a year earlier, according to recent data. Borrowers with a modest credit score of 580 are eligible for receive an FHA-backed mortgage for a down payment as low as 3.5%. (Source: “3% Downpayment FHA Loans Surge As Subprime Buyers Are Back In The Housing Market,” Zero Hedge, January 26, 2017.)

This real estate market forecast cannot end well.

Looking Ahead in 2017

Will the real estate market crash in 2017? That depends on your definition of “crash.” If we take a commonly-used definition of a market falling suddenly and disastrously in value, then a crash is certainly possible. We already have recent historical precedent of this type of event taking place (the U.S. Housing bubble of 2008). The dynamics may be different today, but it doesn’t appear lenders or buyers have heeded the lessons of a decade ago. The insatiable demand for leveraged mortgages continues, as does the lending at next to no money down. The market also needs a continuous flow of prospective buyers and this is being threatened today.

At the very least, the real estate market forecast can still get slammed by a correction, commonly defined as a market loss of 10% or more over the span of weeks or months. In fact, it could be much higher than 10%. This has already happened in America on several occasions throughout the 20th and 21st centuries. It could easily happen again if the trifecta of higher rates, a substantial slowdown in immigration, crashing stock market takes place.

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