Real Estate predictions for 2017: Potentially a fool’s errand - Daniel Calano

Daniel Calano, Prospectus, LLC

During the holiday week, I received a clever New Year’s card from a friend, discussing the past year’s activities. He started by saying, the election is over and everybody is elated/wanting to cry; ruined/saved, wealthy/poorer, etc. You get it; it’s your choice, your perspective. In other words, the year has been crazy, regardless of your politics, and the future is uncertain, for better/worse. Despite the uncertainty, I did the research on how pundits feel about the state of the coming year and its impact on real estate. My research echoed my friend’s sentiments. The pundits were all over the board. They opined: interest rates are up, and we will be enabled/penalized. The international situation is worse, but the stock market is thriving/overextended. Real estate is strong…. or in bubble mode. Uncertainty reigns. So, it’s a fool’s errand to try to predict what will happen in 2017, but here it goes, a summary of the research.

1). The first thing that seems certain is that uncertainty could put things on hold. When confused or worried, psychologists tell us that people stop to wait and see. This seems to be the overriding and prevailing prediction espoused by all. Already reports from NYC are some projects not moving forward.

2). There will undoubtedly by a short term stimulus in the economy. This is already evidence by enthusiasm in the stock market. If effectuated, a combination of tax cuts with new government spending on the nation’s infrastructure and defense will provide a boost. Consumer confidence will continue to increase. On the other hand, this could easily lead to higher inflation, causing higher than expected increase in interest rates, a formula for slow-down.

3). Regarding likely changes to Dodd-Frank law, financial regulation will shrink to some degree. On the positive front, less regulation for small banks would allow them to make more loans which will boost home building activity. On the down side, less regulation for large banks could lead to similar exotic banking problems like those caused within the great recession.

4). International investment might slow or dip as foreigners view the U.S. having less certainty, with interest rates and strong dollar. According to CEO Zach Ehrlich of Mdrn Residential, international purchases in NYC have already slowed. On the flip-side, this could be counter-balanced by increased flight money from countries in far worse turmoil.

5). With regard to immigration limitation, potential construction costs could increase with less labor available. This would also move non-union work to more costly union work. On the other hand, the Fiscal Policy Institute says that, at least in New York, there has already been a leveling off of immigrant labor since the early 2000’s, and there will be less future impact than thought.

6). With an overall softening of regulations, land use and zoning could become more flexible, creating opportunities in home construction. On the other hand, most regulation is local, and it would take longer, if ever, for local boards to follow federal moves.

7). Homeowners in flood and other hazard zones will likely have less federal assistance. Between hurricanes, earthquakes, wildfires, etc., the federal assistance program is already 24 billion dollars in the red. It is unlikely this will be increased/continued, potentially dampening demand.

8). Along with other regulatory reform, tax reform could be an advantage to some, but not all. For example, there could be reduction in mortgage interest deduction, cutting of exemptions for capital gains on sale of primary home, reducing or eliminating property tax deduction, and so on. These would clearly be a negative impacts on real estate.

Thus, the conundrum. Not only is it unclear how many of these changes will occur, it is unclear how they will impact real estate. It depends on where one is within the spectrum; some will be advantaged, and some will not. I’d like to say some things are certain, but that would certainly be foolish. What it means to me is to stay as well informed as possible on all that unfolds, and try to relate it to our real estate work.

Daniel Calano, CRE, is the managing partner and principal of Prospectus, LLC, Cambridge, Mass.