Could Donald Trump and his recent situation crash the market? Now before we begin, this is not a political article. I’m going to do my best to stick to FACTS and my personal response to the situation arising with the whole Michael Cohen and Donald Trump’s recent event. Michael Cohen, an attorney, has pleaded guilty to Donald J Trump’s campaign finance law violation. We’re not going to say whether President Trump did violate any laws or didn’t. We’re going to leave that to the news but what I WILL say is that this situation can have a domino effect on the Mid-Term Elections which then can affect the economy come 2019. Also, it doesn’t help with the fact that the Federal Reserves just may raise the interest rates next month. Exactly when? We don’t know… But we know it’s coming.
Something to look out for is the chaos behind this situation. We know that the Democratic Party is not a fan of Donald Trump and they will be motivated to impeach him at any chance they can get. While highly unlikely, the Democratic congressmen/women will introduce an impeachment of the President if they gain majority this come November. If the Democrats take the majority of the U.S. House of Representative and the Senate, the Democrats will push for an impeachment. Here’s why this is relevant to our real estate investing market. When there’s a certain level of uncertainty in the government, it can certainly have an affect on the Stock market in general and could trickle into the Real Estate market. On top of that, the Democrat majority will likely introduce legislation and regulation that would undo much of Donald Trump’s effort in the new tax laws, reformation of health care laws, as well as the recently passed banking law reformation. While the Democrats may do this to fit their philosophy in what they believe is to be right, this will add ton of conflicting attitude in the market which could change the direction of where our economy is headed.
Now, this is a hypothetical projection and it’s a weak one. But it is a likelihood.
About 2 weeks ago, the Federal Reserves met to discuss yet another interest rate spike this coming September. It is definitely a signal that the Feds are trying to slow down an ever-growing economy. With a reported 4.1% in our GDP during 2nd Quarter of 2018, we are breaking numerous records in terms of how our economy is performing. Historically speaking, a rising interest rates almost always precedes the market crash. From our time of the 1959 through now, it has ever been true except for one occasion. Take a look at this chart: https://www.thebalance.com/us-gdp-by-year-3305543
Now the rising interest rates will certainly have an impact on commercial loans as most commercial loans that were originated 3-4 years ago will come due in 1-2 years. Most commercial loans have a 5-10 year balloon (5 being common). Which means, the borrower either has to come up with the entire amount to pay off the loan OR they would have to refinance. Otherwise, they would face a potential foreclosure or a default to be more precise. If the interest rates go up at the rate that they are now, borrowers looking to refinance would need to refinance at a much higher interest rate than what they borrowed for. Which means, their DSCR (Deb Service Coverage Ratio) will change negatively. The investor would have to give up a portion of their cashflow to pay more interest. If the banks see that the net income isn’t enough to cover the mortgage payment every month, the banks may choose not to refinance the loan that is due for balloon which leaves the investor stranded and could possibly lose the property.
The midterm elections are coming up in November and this is more of a local issue than a country-wide issue. Pay close attention to who you elect and who is on the ballot. Depending on the candidate, your newly elected officials may create laws and enact policies that may NOT be friendly to us, real estate investors. For example, the newly elected governor may want to raise the property taxes to create a new “pension” program to pay the Union workers. Well, that means us, investors, have to pay more out of our pocket to keep our properties around. This may cause a city or an entire State to consider migration out of the State over to another state. Another example would be an attorney general position. Depending who is elected to be your attorney general, pay attention to their previous cases and history dealing with real estate investors. Have they been friendly to investors or have they been ruling in favor of tenants and the public? If an anti-investor official is elected, you may experience adverse effects on your business and to the local market.