Federal Elections and the Real Estate Market

https://www.jstor.org/stable/43821578

By now everyone is aware that there’s a slowdown in the real estate market. It affects every aspect of our industry albeit to varying degrees. Inflation and rapidly rising interest rates are often cited as the predominant factors. However, builders, developers, and real estate professionals must wonder if the slowdown is attributable to next month’s federal elections. Based upon precedent and data, the answer is yes.


Sales Volume and Election Years

In a study conducted by Meyers Research, new home sales activity drops 15% from October to November during an election year when compared with non-election years. Other findings seem to corroborate this data. Jonathan Miller, an appraiser in New York City, observed a similar decline in New York City co-op sales leading up to an election. Between 2008 and 2019, co-op sales began to drop in July preceding a November election which led to an average decline of 12.7% when compared to non-election years. In their article “Elections, Uncertainty and Irreversible Investment,” Professors Brandice Canes-Wrone and Jee-Kwang Park suggest that the real estate housing market routinely experiences a pre-election decline. Their research found similar declines at the state level during gubernatorial election years. The theory is that fiscal, regulatory, trade, and other policies are affected by electoral outcomes, and can influence the value of certain types of investments over others. Therefore, people take a ‘wait and see’ approach when considering “costly-to-unload” investments.


Industry experts agree that the closer we inch toward November elections, the greater its affect, or slowdown, on the real estate market. Elections breed uncertainty. Our visceral reaction defaults to emotional decision-making rather than rational decision-making.


Real Estate Pricing and Election Years

Exactly how is pricing affected during election years is up for debate. While sales volume is easily turned off like a water spigot, the pricing metric is hard to track since significant price change takes time. In a 2012 California real estate market study conducted by Movoto, price appreciation lagged gains from non-presidential election years about 1.5%. Admittedly, such a small percentage does not seem like much, but when applied to the average home price in the U.S., an election year has the potential to cost homeowners thousands of dollars in lost appreciation value.


Do Election Hangovers Exist?

Studies show that the December after an election, and carrying into the following year, sales rebound and compensate for those lost leading up to the election. Stated another way, the months immediately following an election outperform their non-election counterparts. The presumption is that buyers quickly return to rational thinking once an election has passed. It appears that political clarity translates into real estate stability.


Conclusion

We face a unique set of circumstances and challenges heading into these midterm elections. On the one hand, additional interest rate hikes are a foregone conclusion as the Fed tries to curtail inflation. On the other hand, a tight housing market persists which strains supply. Coupled with low unemployment, potential buyers have not disappeared from the market. So whether you consider the looming midterm elections to be a phony fear factor not affecting the real estate slowdown or a legitimate reason, everyone may be pleasantly surprised by a strong December and January.

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