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Solid Job Growth Bolsters U.S. Economy, But Proposed Tax Reform May Impact Stability

Payroll expansion bounced back in April as employers added over 200,000 new positions for the third time this year. After last month’s below-average headline figure, and weak GDP growth in the first quarter, doubts about the economy’s momentum began to surface. However, the economy remains on solid footing and is expected to add approximately 2.5 million jobs this year as GDP expands in the low-2 percent range.

March Jobs Graph

With job growth back on track, the Fed’s schedule of interest rate hikes remains fairly clear. The odds are high –  80 percent likely – that a rate hike will occur in June, and banks will move ahead of that date to adjust rates on mortgages and other loans. According to Freddie Mac, interest rates are hovering near 2017 lows, providing homebuyers and investors with an opportunity to acquire assets before the cost of capital increases. Beyond June, we expect the Fed to lift rates again in December.

Trump’s Tax Reform Could be Mixed Blessing for Real Estate Investors

After funding the government through September, Congress is expected to shift gears to tax reform in the coming weeks. President Trump’s proposed tax plan, which has yet to be negotiated by both the House of Representatives and Senate, could impact investors in a number of ways. First, a decrease in capital gains could make the market more liquid. This could be a boon for first-time homebuyers as homeowners with second homes begin to take profits. In the meantime, the prospect of lower capital gains could limit these real estate transactions until tax reform is finalized.

The other challenge for real estate investors could be like-kind exchange reform. Also known as 1031 exchanges, this provision of the current IRS tax code enables investors to defer capital gains until liquidating their real estate investments. If this section of code is eliminated, much of the investment real estate activity will freeze, keeping many smaller players on the sidelines.

Sources: HomeUnion Research Services, Bureaus of Labor Statistics, Freddie Mac

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