This is an interesting take on the new Dem Congress from Real Estate Broker and “The Apprentice 3″ winner, Kendra Todd. I’m hardly an expert on matters of real estate speculation, but I’d like to examine this brief articles contentions in a bit more detail.
Now that they have control of the House and Senate, plenty of questions are whirling. What will the Democrats do about Iraq? Immigration? Global warming? Tax cuts? Well, we’re about one issue around here. What does the Democratic Congress mean for the real estate market?
I’m not sure that even Democrats know what they are going to do about any of the issues mentioned. Well, ok, they have pretty much said that the tax cuts are out the window. Jolly good. Give voters less reason to pull the (D) lever come 2008.
The truth is that the party in power has less to do with the state of real estate than the chairman of the Federal Reserve Board. When the dotcom bubble popped, then-chairman Alan Greenspan presided over a historic series of interest rate cuts that dropped rates to almost-invisible levels. That paved the way for the boom in the real estate market which has been the underpinning of the U.S. economy for the last five years.
I think that this is probably a good assesment of the situation, especially in light of Jimmy Carter’s extremely late term appointment of Paul Volcker as chairman of the Federal Reserve Board. Volcker did some great work in revitalizing the US economy, although the consistent positive message that President Reagan conveighed certainly didn’t hurt. Greenspan worked similar wonders in the 1990′s and into the early 21st century.
Now, under new Fed chairman Ben Bernanke, the board has been slowly raising rates to head off inflation as the economy seems to be making a comeback. Aware of the impact his decisions have on homebuyers, Bernanke has even weighed in on the real estate market, saying in a speech in San Jose, CA, that consumers should become more educated in the areas of adjustable rate mortgages and “sub prime” loans.
And I’m glad that Chairman Bernanke is taking these steps very slowly. Heading off inflation is very important, as we don’t want to wind up in the same situation we were in during the 1970′s. It’s also important that consumers follow the Chairman’s advice : educate yourselves about how mortgages and other credit instruments really work. It’s only your future that you are risking.
Will the Democratic takeover change Fed policy? It’s unlikely. But how is the changeover in Congress likely to affect the market as a whole? No one seems to know.
Well, I’m pretty sure that the oil industry is going to suffer from “windfall profits” taxes, constant financially draining legal battles and Congressional investigations, and endless increases in taxes (especially capital gains taxes).
The recent real estate boom had more to do with rate cuts than with Bush administration economic policies, but the drop in the capital gains tax rate to 15% certainly didn’t hurt, and convinced more people to pull their money out of the financial markets and buy real estate, propelling the market.
Hmmm… decrease in taxes leads to increase in investing. Where have I heard that before? Certainly not in any Democratic party meetings.
Republicans tend to favor tax cuts, whereas the Democrats are already talking quietly about eliminating the Bush tax cuts for the very wealthy, which might impact the market. Today, more people than ever are using 1031 tax deferred exchanges, so if the Democrats rolled back the capital gains tax cuts, a lot of folks would get hit pretty hard. But there’s no way to know what they’ll do until later this month.
And Republicans have got the equation half right. Tax cuts + reduced government spending = economic success. Dems haven’t even opened up the old economics book yet. I’m pretty sure we know exactly what they’ll do later this month : revive the revolution; kill the bourgeouisie; class warfare is back on again, comrades.
Economists tend to look at the big picture for evidence of big financial swings following a turnover, so let’s look for a partisan effect either way. Writing in the Wall Street Journal Online, economist Mark Thoma cites University of Maryland economist Allan Drazen’s work, which finds that Gross Domestic Product tends to be substantially higher during the first half of new Democratic presidential administrations. But there’s no such information available related to dramatic switchovers in Congress.
Unless you give full credence to the actual plans disclosed by Democrat leaders, in which case, such information is available.
Also writing for the online Journal, economist Justin Wolfers suggests that since Democrats tend to care more about unemployment than Republicans, they offer better odds of the economy avoiding a recession. But it’s possible that potential would be outweighed by the harmful effects of tax increases that would force people out of the real estate market and back into securities.
Two good points, however, they miss the mark a bit. The responsibility for avoiding a recession is fairly squarely laid on the shoulders of the Chairman of the Federal Reserve. Currently, academic Ben Bernanke. While any tax policy set by Congress will certainly affect the economy and may contribute toward recession, it is the Chairman’s responsibility to adapt policy to avert economic downturns. Also, keep in mind that the author of this article, Kendra Todd, is a real estate professional with a natural bias toward said industry. Any attempts by investors to move away from old-school investment in real estate toward investment in, say, tech stocks, represents a direct threat to her livelihood. She is naturally going to be critical of any policies supporting that.
Maybe the best thing to do is take a look at what happened the last time Congress saw a palace coup: 1994, the year of the Newt Gingrich Republican Revolution and the Contract with America. What happened to the real estate market after the GOP took over Congress? Well, after dipping sharply in 1994, housing prices nationwide began a robust recovery in 1995, increasing 44 percent from then to 2005, adjusting for inflation. That ten-year boom was driven in part by the dotcom bubble, but was it the result of Republican congressional action? Remember, Bill Clinton was president.
The real estate bubble is on the verge of bursting, if it has not already done so. Chairman Bernanke has announced that he is going to slowly raise interest rates (those of you with ARM’s be warned). The boom of the mid-nineties was partially Congressionally driven, but primarily Greenspan-driven. President Clinton merely rode the wave of economic success. He did not, in any way, create it. Also, the situation is reversed in 2006/7; effects of Congressional tinkering with the economy are going to be based on left/left-of-center economic and political theories, unlike the right/right-of-center ideas ushered in by the Gingrich Congress.
In the end, it’s sustainable economic growth that matters most to the real estate market. Many people will argue that the boom market was actually damaging to the economy, contributing to economic inequality in our country. Today, the U.S. economy is rather volatile, but recent figures show unemployment dropping and real wages rising, so better times may be on the way. Will Democratic changes scare the companies into freezing hiring and outsourcing more work, or will the prospect of middle class tax cuts pump more money into the economy, strengthening real estate markets that are now languishing?
Booms and busts are a natural part of the economic cycle, however using disingenous and highly loaded terms like economic inequality contribute nothing useful to the debate. Raising the minimum wage is an important issue, and is dealt with effectively by my co-blogger, Lance, here. As to the prospect of middle class tax cuts emerging from the incoming Congress, I have yet to see any such proposals and, frankly, don’t expect to. Real estate will continue on a downward spiral for the next several years, IMHO. It enjoyed a massive boom over the past decade, and is now settling back down to Earth. This is what would be called in Wall Street terms, a “market correction,” although I daresay that it will last longer than similar occurrences with the stock market.
Perhaps Wolfers says it best: “Finally, perhaps the lens of ‘left’ versus ‘right’ is not the most important factor in these midterm elections. Rather, we are facing the choice of unified versus divided government. In this context, the question is whether a Democratic Congress is likely to impede good government or provide a useful check on bad government.” Time will tell.
In absolute terms, no, perhaps left versus right is not the right way to evaluate the candidates and their plans for the future. It should, rather, be concrete proposals put forth by said candidates. The unified-divided government argument is irrrelevant and rapidly becoming boring to me. Its use has been mainly confined to sound-bites from Congressional leaders and media talking-heads (usually the ones most involved in creating division). Time will indeed tell, but the “FIRST HUNDRED HOURS” (a phrase Dems seem overly fond of) don’t seem to be particularly promising.