How the Midterm Elections Could Affect the Real Estate Markets

Finance

  • Author Eugene Vollucci
  • Published December 11, 2018
  • Word count 590

Los Angeles, CA. Democrats have taken over the House and are projected to push through an agenda that prioritizes infrastructure and tax reform, shaking up real estate markets nationwide and in pricey cities like Washington, D.C., New York and Los Angeles.

Groups of Democratic legislators are already aiming to repeal and replace the $1.5 trillion Republican tax plan signed into law by President Donald Trump in December of 2017. That would probably mean higher corporate tax rates and a reversal of Trump’s tax cuts for the wealthy.

Real Estate market gurus will soon be predicting the impact and advising you how to position your real estate investments.. Your optimal strategy is to ignore their recommendations, at least with respect to the long term.

If asked to guess how real estate has performed following midterm elections, many investors would base their answers on a simple narrative, such as: "Republicans favor low taxes. Democrats want to regulate business more heavily. Logically, therefore, real estate performs better when Democrats prevail than when Republicans do."

Historically, real estate did not always rise following Democratic gains. In fact, many post-election gains and declines occurred with the same frequency whether Republicans or Democrats gained seats. However, in the first Congressional session after election days, declines were more frequent when Republicans gained seats.

These findings, however, are no cause for celebration by either party. None of the differences between the Republican and Democratic were significant.

What seems to be important is not a mere pickup of seats, but rather a change of control of the House or Senate. Both chambers flipped twice to the Republicans (1946 and 1994) and twice to the Democrats (1954 and 2006). The Senate alone flipped to the Democrats in 1986. The House alone flipped to the Republicans in 2010 and to the Democrats in 1930.

One of the worst periods of real estate following the 1930 midterms posted the biggest post-midterms decline. That period, however, represented one of the worst stretches of the Great Depression, marked by a second wave of bank failures in mid-1931. In short, economics likely overshadowed politics.

Similar, the 2008 financial crash was not entirely cause by politics. It had long roots.

"The immediate trigger was a combination of speculative activity in the financial markets, focusing particularly on property transactions – especially in the USA and Western Europe – and the availability of cheap credit", says Scott Newton, emeritus professor of modern British and international history at the University of Cardiff.

He goes on to say "There was borrowing on a huge scale to finance what appeared to be a one-way bet on rising property prices. However, the boom was ultimately unsustainable because, from around 2005, the gap between incomes and debt began to widen. This was caused by rising energy prices on global markets, leading to an increase in the rate of global inflation.

This development squeezed borrowers, many of whom struggled to repay mortgages. Property prices now started to fall, leading to a collapse in the values of the assets held by many financial institutions. The banking sectors of the USA and the UK came very close to collapse and had to be rescued by state intervention."

"Excessive financial liberalization from the late 20th century, accompanied by a reduction in regulation, was underpinned by confidence that markets are efficient," says Martin Daunton, emeritus professor of economic history at the University of Cambridge.

To sum up, there is no connection between real estate performance and outcomes of midterm elections. That fact will probably not dissuade strategists from advocating investing tied to their predictions of changes in the congressional lineup..

ABOUT THE AUTHOR: Eugene E. Vollucci is the Director of The Center for Real Estate Studies, a real estate research institute. He is author of four best selling books and many articles on real estate rental income investing and taxation. To purchase a subscription to Market Cycles and to learn more about the Center for Real Estate Studies, please visit us at CALSTATECOMPANIES.COM

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