February 2017 Real Estate Outlook

Press Release (ePRNews.com) - LOS ANGELES - Feb 10, 2017 - In addition to the political earthquakes triggered by the US presidential election and Brexit, there are four slower-moving, albeit important, changes under way.

         First, the political consensus about fiscal expansion: this had started to shift; even before the Trump win turbo-charged expectations in other countries either have moved away from fiscal consolidation or are pushing for fiscal expansion outright.

         Second, medium-term inflation expectations: these seem to have finally bottomed out in mid-2016 after being in decline for years. Year-on-year growth may have been mediocre given the prevailing economic expansion, but the business cycle has been long, with output gaps closing steadily and US economy reporting full employment for quite some time now. This is finally being reflected in inflation data.

         Third, at the same time, we would like to point out that there is an

unusually high dispersion of potential economic outcomes. This is partly due to the uncertainty regarding President Trump’s policies and their impact on our economy.

         Fourth, in addition, will President Trump be able to push through his intended fiscal stimulus without having to offset it by any spending cuts, a stance that goes against decades of Republican paradigm on public debt?

         The following analysis relies on assumptions based on our opinions. Only time will tell whether we have based our analysis on the correct fundamentals. However, policy uncertainty in the US is not the only unknown in the equation that could be dramatic. Growth acceleration is likely despite policy uncertainty in the US.

         Next year’s economic performance depends heavily on how President Trump goes about implementing his two-pillar economic agenda: trade-related tariffs and the possible “re-negotiation” of existing trade agreements, and an economic stimulus provided by tax cuts (and tax reforms) and fiscal spending.

         President Trump has already announced that this administration will suspend the Trans-Pacific Partnership (TPP) – a trade agreement between the US and 12 countries from Asia and the Americas whose aim is to reduce trade barriers between the countries in question.

The US Trade Association estimates that the enactment of TPP would

have resulted in a long-term GDP gain of around 0.5% for the US. To date, it is still unclear whether President Trump will immediately impose tariffs, as promised during his campaign. However, imposing tariffs on imported goods and services from targeted countries results in lower consumer spending and rising producer and consumer prices. In addition, projected weaker trade volumes and consumption, and uncertainty in the real estate markets.

         Many major markets throughout the United States have sustained drastic drops in rent growth over the past 15 months. While the slowing pace of job growth contributed a lot to those declines, the sheer amount of new supply being delivered to these met­ros was the primary drag.

         On the other hand, the metros with the highest rent growth tend to have only a moderate amount of new supply, which results in quicker absorption and gives property owners leeway to raise rents.

         Nationwide, 379,302 new apartment units have been identified for delivery in 2017, compared to 295,337 delivered in 2016, according to Axiometrics pipeline data as of Jan. 16, 2017. Job growth, the primary driver of apartment demand, since new workers can afford a place to live, fell to 1.5% in De­cember, according to the Bureau of Labor Statistics (BLS). Increased supply and decreased demand mean property owners and managers must seek lower rents to fill their units.

         With his victory as President, the economic landscape for real estate investors has materially changed. Even with the details of his political agenda still uncertain, the new US government administration’s policy package will most likely result in stronger domestic demand growth. Hence, rising economic growth may lift economic activity above the rate of expansion of potential output; estimated economy is making a rebound in real estate investment increasingly likely.

         Whether the impact of expansionary fiscal policy under President Trump is offset by restrictive trade policies depends on the magnitude of the tariffs imposed. US economic growth may accelerate to around 3% in the second half of 2017 as policy lags delay the implementation of such spending by approximately six to nine months. Overall, the US economy is expected to shift into higher gear next year, driven mainly by additional private consumption fueled by tax cuts – at the expense of a higher budget deficit. All things being equal, the impact of these tax cuts on GDP growth will only be temporary and will fade in the course of 2018.

         To sum up, the near-term economic effect would likely be a drag on growth. This may be offset by economic stimulus. Assuming tax cuts that bring about a 2% reduction in GDP revenues, as stated by President Trump during his campaign, primarily through income and corporate tax reductions, private spending should rise to stimulate the economy.

ABOUT THE AUTHOR: Eugene E. Vollucci, is  the Director of The Center for Real Estate Studies, a real estate research center He is author of four best selling books  and many articles on rental income investing, apartment investing, real estate and taxation. To purchase any of our reports and to learn more about the Center for Real Estate Studies, please visit us at   http://www.calstatecompanies.com

Source : Center for Real Estate Studies

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CATEGORIES : Real Estate
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