Realty411 Magazine Featuring Lee Arnold from Cogo Capital | Page 36
The Federal Government
Economic and Housing Repercussions
When it comes to the federal government, we’ve
seen major policychanges that are influencing the
housing market. Several are contained in the massive
tax reform package that cut taxes and changed the rules
for deductions. By lowering the corporate tax rate to
21%, businesses have more money to reinvest and
expand their workforce, which puts more people back
to work.
One of the biggest benefits for real estate investors
is the new passthrough rule that allows people with
LLCs and similar business operations to take a 20%
deduction. So there are big benefits for all those Mom
and Pop landlords who operate as LLCs. The new rules
also preserve the highlyprized 1031 exchange, which
was at risk of being eliminated. The new Opportunity
Zone tax break program is also part of that tax package.
Homeowners didn’t make out as well. They lost
deductions for things like vacation homes and large
mortgage payments, making homeownership, for some
people, more expensive.
So here are some of my predictions for 2019:
• The GDP will slow down to around 2% from 3%,
as the effects of those tax cuts wear off. High
housing prices and interest rates could also help
slow growth, along with trade tensions, domestic
politics, and the current pullback by China. But, I
don’t think we’ll see a recession this year.
• Unemployment will rise slightly due to a
changing workforce that includes less corporate
dollars for new jobs. An unemployment rate of 4 to
6% is considered healthy, so a slightly higher
jobless rate could be good for our economy.
• Mortgage rates will remain relatively low. The
Fed is expected to hold off on rate hikes during the
first half of the year as it reassesses the economy.
If we see another rate hike or two, it probably
won’t take place until later this year.
• Consumer debt will increase because it’s now
more expensive to borrow money.
• Demand for rentals will remain strong because
homeownership has gotten more expensive.
Low Unemployment
As I mentioned, those tax cuts were designed to
lower the unemployment rate, which is now so low that
it’s actually unhealthy for the economy. The data shows
that we have more open positions than people looking
for jobs. When there’s a shortage of workers, employers
have to pay more. That extra expense is then passed on
to consumers in the form of higher prices which
contribute to inflation. If we start seeing higher prices,
the Fed will be inclined to raise those shortterm
interest rates, which can also trigger other repercussions,
like that stock market volatility.
What we need is workforce growth right now not
job growth. And this is a critical element for today’s
economy because our workforce is actually shrinking.
The U.S. birthrate has dropped to a 30year low and
continues to fall. Baby Boomers will be retiring in
massive numbers, leaving more open positions in their
wake. And there’s the debate over immigration, and the
value of immigrants for jobs like farming and
construction.
Return to Normal Gains
We've been so spoiled over the last 10 years by
doubledigit gains. Investors need to start expecting more
normal returns. Syndications will go back to 6%
preferred returns, with an equity kicker on the back end
that would bring the IRR to just over 10%. Unless you
find that home run like our development in Costa Rica,
where we got the land cheap and received entitlements
quickly such that we were able to get our glamping resort
up and running, effectively lowering holding costs. We
are expecting investors to receive an 18% return on that
one. But these types of deals will be fewer and further
between.
If you’re expecting another 2008 housing meltdown
where you can pick up properties for pennies on the
dollar, you may be waiting a long time.
35