How the New Congress will affect the Real Estate Industry
Red + Blue = Purple
I'm aware any analysis of politics, and its economic effects, is always a tightrope walk, so my thesis will ere on the side of simplicity.
Yesterday's election's results weren't unexpected... many of the pundits were prepared for the House returning to a Democrat majority. The lopsided conversion of seats from Red to Blue was unexpected, but just that fact is overrated... in Congressional politics a majority is a majority whether by 1 or 15. The reality is the lopsidedness reflected an overwhelming change mandate and today, Rumsfeld is out... that's a swift mandate... the markets took notice of that ("change is good") and upturned as the news was broadcast and now the Dow is at an all time high.
So with swagger, Democrats are already punching at the obvious targets - Iraq, lower priced drugs for seniors, and a RESPA-like lobbyist transparency bill. However, the key election issue according to exit polls is the economy... that means the public is uncomfortable.
Paradoxically, the Democrats never made the economy the issue and the Republicans thought the decent economy and October stock market runup was their ace in the hole (which was overwhelmed by the change mandate). In this sense, the Democrats haven't really espoused a plan for the economy, so the media/everybody is assuming that an economic deadlock is in the works where neither party will actively propose anything for fear of tipping the economy backwards. At least, say the Dems, pulling out of Iraq will help to ease the budget deficit.
We're in real estate so we place undue emphasis on what happens to the housing markets, but most of America isn't worried about housing as much as the threat of recession, caused by inflationary pressures or a stuttering economy, or both. In any case, the key to staving off recession and supporting the housing markets lies in the Fed's interest rate policy.
I mentioned last week that there are conflicting, confusing reports on whether interest rates will increase to reflect inflationary pressures or ease to maintain an economic "soft landing".
Here is an oft-cited and frankly, plausible scenario - - - the dollar is headed for a crash due to a weakening economy, massive account deficits and overstimulated money supply (cash is out there but our Asian partners don't want to continue buying "junk" Treasuries). If the dollar crashes, interest rates must rise to support it. Will the Fed sacrifice the economy and raise rates to maintain the "dollar hegemony"? This article published today makes interesting points about this proposition, but it reeks with "conspiracy theory by Bush and his corporate pals" so it has credibility problems.
Here's my point - the Dems won't let the Fed sacrifice the economy, they will fly in squawking "checks and balances" and "protect the middle class"... (btw I'm not saying the Republican dominated government of yesteryearday would sac the economy either). By extension, the Dems will likely push for calculated interest rate easing to ensure the economy is oiled and they will rationalize "we have no part in this massive deficit (that requires the strong dollar to maintain our current account deficit or it spirals out of control), see what a mess you guys got us into". We're in real estate and lower rates will stimulate our business. I think this is one simple reason why the political sea change won't hurt our industry.
Addendum 11/9/06 - two more contradictory articles today:
Dollar Reaches 2-Week High Against Yen on Reduced Trade Deficit
Washington and the Bond Market
Technorati tags real estate 2006 elections Democrats Republicans economy recession
This is a discussion that everyone's thoughts are like -- well you know. Neither of the scenarios are rosy, whichever one happens -- it will be decried as wrong by the other side.
All I know is that traditionally the fourth year of a presidency is the best for the economy and the third year is the worst.
BTW - I've moved over to WordPress on my blog. Slowly moving all my stuff across, Another downside to GoDaddy. They don't have a very good export system. So it is taking a lot of cleaning to get the posts transferred.
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Toby, your 3rd year /4th year theory may be just as predictive as others out there... good to migrate to WP now rather than later... I will now have to have someone to migrate my long blog...
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