I want to focus on how the election outcome and Fed rate cuts will affect the economy, interest rates and real estate prices.
Everyone has their own view on who they want as president, but the current odds are that Trump will win the election.
However, as we all know, anything can happen so we need to develop a view on all outcomes.
Many of us, myself included, have no sense of Harris’ economic policy yet, which will become clearer as time goes by, so for now, my view is Harris’ policies = Biden’s policies.
The Fed
Jerome Powell delivered his bi-annual congressional speech on July 10th and said that a rate cut was “possible” before inflation reached 2%. The market (Fed Fund futures) predicts a 0.25% cut in September but there is an outlier chance we see a 0.50% instead. I strongly doubt The Fed will cut “during” an election (the November FOMC meeting).
A rate cut is, of course, very positive for everyone! Let’s hope for a 0.50% cut!
Contrary to popular belief, The Fed acts independently, and its 12 members meet 8 times a year to discuss and vote on the FOMC’s open market operations, which are:
- The Fed Funds rate (what banks can lend to other banks using this overnight rate)
- The Discount Window (what The Fed lends to banks as lender of last resort)
- Bank Reserve Requirements (the amount of cash banks need to have sitting in the vaults of their regional Federal Reserve Bank)
The Fed’s “dual mandate” is to manage price stability (inflation) and employment—that is its only focus.
What happened next…
As a professional investor for nearly 30 years, I have never seen a sector/index rotation as violent as what we saw in the Russell 2000 (small cap index).
So much money moved from big cap tech into small caps because of 1) expected rate cuts and 2) some elements of the Trump Trade (bank deregulation, reshoring of manufacturing - more below).
This, of course, is great for the economy!
Lower rates = lower borrowing costs for a broader part of the economy.
More profitable companies = more hires = more renters = good for property investors!
Who/What gets affected by Trump vs. Harris (Biden) + The Fed
I’m going to focus on only the “good for” sectors under each candidate + The Fed, and not talk about potentially negative events like increasing taxes, 60% tariffs on Chinese imports, Fed balance sheet tightening etc.
- The Trump basket
= tax cuts, deregulation, weak USD
Good for: crypto, energy, industrials, commodities, regional banks
- The Harris (Biden) basket
= tax hikes, more regulation, fiscal spending
Good for: big cap tech, ESG, healthcare, construction
- The Fed cutting rates
Good for: small caps, weak USD, home buying, refinancing
- Weaker USD
Good for: overall growth, U.S. exporters are more competitive, everyone in Asia (cheaper commodity imports), U.S. real estate is cheaper for overseas borrowers
Note => a weaker USD is ‘GOOD’ for everyone!
U.S. real estate is possibly one of the best investments you can make!
My view is strictly from the standpoint of an investor earning rental income and capital appreciation - the fundamentals are as strong as ever!
Our argument in one sentence:
Between 2012 - 2022, there were 6.5 million more households formed vs. homes built!
Guess how many homes were built in 2023 - only 1.4 million!
My point is that the supply-demand imbalance is unfixable, and the trend going forward is more renters/less primary homeowners.
This is good for landlords who will continue to have pricing power. We are already seeing rental yields of 12-15% in the Sunbelt states and increasing!
You know who else knows this? Institutions like Blackstone.
Try Googling “Blackstone buying single-family homes.” You will see major institutional buyers of single-family homes. You can draw your own conclusions here.
What I tell my clients every day - if you can make the numbers work now, you will only make more money in the future as 1) rates come down (expenses) and 2) rents go up (income) = increased margins = increased profits.
When home prices increase, you can refinance the home at a higher value and recoup some of your initial investment.
“…most (new homes) of it will be used for rentals and won’t address ongoing affordability challenges in the for-sale space,” said Hannah Jones, economic data analyst at Realtor.com.
Looking for a newly built single-family home?
We are offering brand new Texas single-family homes 40 minutes away from Dallas for US$300K+ with low teen gross rental yield. We also provide affordable property management services as well.
Interested to dive deeper? Contact me directly.
