After the initial shock, Wall Street indices closed at new highs two days following the election of President-elect Donald Trump. Equities have reacted to speculation and enthusiasm, rather than any new underlying policy changes or announcements.
It’s safe to say that the stock market will continue along the bumpy path that has been prevalent during the past 18 months. Gold, meanwhile, will inch higher with inflation and uncertainty. We expect precious metals to modestly outperform inflation barring a black swan event.
The energy sector is not expected to make dramatic changes in 2017. The incoming president will likely be more accommodative to pipelines that will bring crude oil from Canada into the U.S. Although OPEC members have agreed in principle to cut production for the first time since 2008, however the meeting to decide quotas will not happen until the end of this month.
Iran, who recently re-entered the world oil production stage, will be hard-pressed to cut production and Russia recently amplified output. Huge deficits at OPEC member countries, easier access to supply from Canada, and idle fracking wells awaiting a resumption of production will keep upward pressure on energy prices from rising.
Meanwhile, real estate should remain a viable investment vehicle well into the new administration. The Fed is poised to raise interest rates in December, which will exert upward pressure on mortgage rates and leave some potential first-time buyers on the sidelines.
Favorable yields, particularly for single-family rentals (SFRs) in some of the less expensive markets in the country, will attract capital from retirees or late-career baby boomers attempting to limit their exposure to the volatile stock markets.
Nationally, average cap rates should fall into the low- to mid-5% range in the opening months of 2017. In some Southeast markets, first-year returns are expected to begin the year 200 to 300 basis points higher, encouraging buyers to commit to longer-term investments.
The homeownership rate, meanwhile, is very close to the all-time recorded low and should inch lower as higher prices limit attrition from rentals. Next year, the homeownership rate is projected to decline close to 62.5%, which could equate to more than 1 million new renter households. Less than half of those renter households will find new apartment units awaiting them.
Despite Trump’s plan to replace Janet Yellen as chairwoman of the Fed, the independent body is unlikely to change the direction of monetary policy. Currently, a December rate hike and three additional lifts during 2017 will add 75 to 100 basis points to interest rates. The move will lift payments on a $200,000 home by $1,300 per year. By year-end 2017, we expect home prices to go up in the 4% range.
With many first-time buyers already stretched with student loans, such a rise should keep some buyers on the sidelines.
The other major factor supporting real estate investment is uncertainty. Both Brexit and President-elect Trump’s victory initially resulted in plummeting stock prices.
Experts significantly misjudged the impact of these events, and created panic that rippled from Wall Street to Main Street. Investors weary of inaccurate forecasts and the remaining upside of the current bull market are more likely to realign their portfolios to hedge against uncertainty.
