Donald Trump’s presidential victory over Kamala Harris was a call for change by voters frustrated by high prices and angry over the influx of undocumented immigrants on the southern border.
Voters’ rejected the Biden-Harris Administration’s current economy, which continues to outperform the rest of the world, a reflection of the impatience of people to feel the effects of economic improvement at the grocery store and gas pump.
The current administration’s economic measures, however, provided 2.8 percent growth in GDP in Q3 2024, created a record 15.7 million new jobs — 700,000 in manufacturing — since the pandemic, and lowered inflation from 9 percent in 2022 to 2.1 percent today.
U.S. Deficit Will Soar Under Trump’s Proposals, Sparking More Inflation
Trump’s supporters are now anticipating lower taxes, lower prices immediately, and deregulation of government rules on everything from environmental protections to public health and industries, including banking and cryptocurrencies.
While his supporters’ most pressing issues were the economy and illegal immigration, they might be surprised to learn that Trump’s 20-point platform, which includes fiscal proposals that will grow the nation’s deficit has the potential to fuel another round of inflation and stymie investment in housing and other real estate sectors, as well as reverse environmental protections at a time when the nation has been devastated by hurricanes, flooding, tornadoes, and wildfires.
According to an analysis by the Committee for Responsible Federal Budget (CRFB), a nonpartisan, non-profit organization committed to educating the public on issues with significant fiscal policy impact, Trump’s proposed fiscal agenda would raise the federal deficit between $7.75 trillion and $15.5 trillion over the next decade, “Trump's agenda is potentially inflationary in three different ways,” said Marc Goldwein, CRFB senior vice president and senior policy director, noting that enacting his proposals would involve $2 trillion in spending over the next 18 months.
He noted that if Trump’s spending and tax-cut proposals are enacted, spending would exceed the current law, which requires debt not exceed 125 percent of GDP. Even at the current spending level of 102 percent of GDP, the deficit will reach the 125 percent maximum in a decade, Goldwein said, but warned that Trump’s proposals take debt far beyond the lawful maximum to about 143 percent of GDP.
His fiscal policies would involve about $800 billion a year (on the low end), he continued, explaining that this might create another one to two percent in inflationary pressure, which the Fed would probably cancel out by keeping interest rates high.
Trump’s Fiscal Plan May Stymie Real Estate Investment
Since the Fed lowered its rate by 50 basis points last month, real estate investors had hoped for another cut this year and early next year to create investment momentum and increase asset valuations. But according to Goldwein, that is unlikely under Trump’s proposed economic scenario. The tax incentive elements of his plan should boost investment but this could be more than offset by the high cost of debt, which is the number one cause of low asset valuations, increased distressed sales, and the drop in real estate investment and development activity since the Fed’s rate increases in 2023.
The additional deficit borrowing and its impact on inflation make it less likely the Fed will reduce interest rates as much as investors had hoped for or at all, Goldwein continued. “And the second thing it might do is make reducing near-term interest rates less effective in lowering long-term mortgage rates,” he added, noting that since the Fed cut its rate last month, the 10-year Treasury has gone up by 70 basis points, and mortgage rates have followed.
How Loss of Immigrant Labor and Trump Tariffs May Impact Consumers
The two other elements of Trump's agenda that could increase price levels are restricting legal immigration and deporting undocumented immigrants, as well as imposing of a 25 percent tariff on imported goods, including on Mexico and Canada—America’s biggest trade partners. Both Mexico and Canada have promised retaliatory tariffs on U.S. products if Trump follows through with his threat.
He also had promised to impose a 35 percent tariff on products from China, which U.S. farmers depend on to buy their excess grain products. The last trade war Trump launched against China caused China to begin buying farm products from South American countries, which hurt U.S. farmers. China had just recently begun to increase imports of U.S. farm products.
“Deportation of undocumented workers would constrain labor supply and reduce wage competition,” Goldwein said, suggesting that this would result in wage stagnation and higher prices due to supply constraints. And while tariffs don’t technically create inflation, he said that it would feel the same as inflation, because the prices consumers pay for imported products would go up—possibly substantially, because tariffs are generally passed through to consumers.
“The potential for a unified government increases the likelihood of an expansionary fiscal policy,” added Economist Brad Dillman, most recently chief economist for RPM Living, an Atlanta-based value-add apartment investment firm. “This means spending by the government through legislation or market actors through lower taxes or both has the potential to lead to higher inflation expectations and higher interest rates,” he warned.
Tax Cuts May Ease Some Consumer Pain
“While higher, long-term interest rates decrease mortgage affordability on the margin, this could be offset by after-tax wage gains through tax cuts, and potentially continued increases in pre-tax average hourly earnings,” Dillman added. He also noted that lower taxes give the market agent—incrementally more funds to engage in market actions, all things equal.
Corporations currently pay a 21 percent tax on their net profits, down from 35 percent prior to the enactment of Trump’s 2017 Tax Cuts and Job Act. Trump has called for further reducing the corporate tax rate from 21 percent to 15 percent, but only for “companies that make their products in America.”
Continuing tax cuts for individuals, which were set to expire in 2025 provides higher after-tax incomes that increase marginal housing affordability to the extent that it provides more personal funds to be dedicated to housing expenses, Dillman suggested.
Additional income, however, apparently did not appease the electorate’s disenchantment over higher prices, as wages increased 25.7 percent under Biden, overcoming the 20.8 percent rise in the Consumer Price Index since 2020, according to the Center for American Progress.
In the case of multifamily rentals, he said that an increase in potential spending is more likely to allow stability or moderate growth in rents, given the heavy supply the sector currently faces (400,000 delivered in 2024 and another 609,000 under construction). He also suggested that slowing legal immigration and deporting non-documented immigrants could have a positive impact on rental rates by reducing demand
In the case of for-purchase housing, higher after-tax incomes may allow buyers to better handle higher mortgage rates and accumulate the savings for down payments, potentially resulting in an increase in existing home sales, Dillman suggested.
And to the degree that fiscal plans result in Americans being in more control of their earnings, Dillman contended that they would gain incremental funds to spend on consumption and experiences, such as travel and entertainment. “Whether tariffs and inflation blunt that incremental spending power is open to question,” he added.
Economist Offers Positive Take on Road Ahead for Real Estate Industry
Kevin Thorp, chief economist at global real estate brokerage and advisory firm Cushman & Wakefield, in a recent podcast cautioned real estate investors to exercise patience in evaluating the economy from a fundamental perspective, as many of the new administration’s decisions that affect performance of financial markets will take several years to percolate.
“If history is any guide, the new political landscape is not likely to fundamentally impact the strong momentum that is already forming,” he contended, noting, however, that GDP growth is already “rock solid,” which points to stronger leasing. On the capital side, the Fed is now cutting rates, so the cost of short-term debt is coming down, debt liquidity is improving, and cap rate spreads are looking increasingly attractive.
“Dry powder is starting to plow into what will prove to be, I think, a very attractive entry point in this new cycle,” Thorp continued, “and so all the data sort of suggests that better days lie ahead for property.”
(Photo credit: Gage Skidmore/Flickr)