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Will Trump or terrorists drive down home prices?

By JEFF LAZERSON / CONTRIBUTING COLUMNIST

4/15/2016

A loyal reader with substantial residential real estate holdings approached me at the gym last week explaining to me that either Trump or terrorism is going to cause real estate values to drop precipitously, according to her financial planner. And, what did I think about that?

Great question. Orange County property values have been on a steep climb for a good five years now. Mortgage rates continue to fall. Is there a price peak? When is that going to hit? Good times or bad, most folks tend to think in the here and now. Buy more? Sell everything? What’s lurking around the residential corner?

On the positive side, Doug Duncan, chief economist at Fannie Mae, believes that California enjoys more concentrated job growth than many other parts of the U.S. And, a lack of land to build on, and the cost to build make homeownership expensive, especially on the low end.

He expects homeownership rates to go back up: “Ninety plus percent of millennials say they want to own a home, just not today,” he said.

Duncan is concerned about where the economy is headed as total outstanding debt has risen relative to U.S. annual revenue generated from goods and services.

“No (presidential) candidates are talking about entitlement reform,” he said. He points to the U.S. outstanding debt at about 80 percent of the GDP. It starts to become worrisome once you pass 80 percent of total debt, he said, citing Illinois as the poster child for what can happen when debt gets too high.

“You either raise taxes, cut benefits, or both,” he said. “You can’t raise taxes enough without stopping economic growth. Our monetary policy is printing money. Where does that end?”

Shawn Becketti, Freddie Mac’s chief economist thinks terrorism is a persistent issue, not specific to real estate.

“The economy is still fairly fragile. It’s growing, but weakly,” said Becketti. He and Duncan called the 2 percent economic expansion the slowest since World War II.

Bicketti likes the fact that this region has a pretty healthy home price to median income ratio (which includes renters). He also cites a shortage of inventory and skilled construction tradespeople that will support higher home prices in the Los Angeles metro area (which includes the OC).

Chris Whalen, senior managing director at Kroll Bond Rating Agency does not think millennials will have the desire or money to buy in the OC.

“You’ll (eventually) run out of buyers,” he said.

Because there is too much money looking for yield, Whalen thinks we can see 30-year rates drop to the 3 percent range.

I’m still very bullish on O.C. real estate, regardless of Trump or terrorism.

Regarding Trump and the entire field of candidates, I agree with Duncan that somebody needs to just say no about entitlements or we’re headed down the slippery slope.

Regarding terrorism, several friends who work in the intelligence world worry about big events that will stop normal daily commerce, shutting down our economy.

If you have questions or comments, please contact Jeff Lazerson by clicking here.

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