Politics and Real Estate: Conjoined Twins
Some people ask me, “Why are you so involved in political discussions?” Then, there are others who are far more critical of my involvement in political discussion (including my own son). And, there are yet others who are also in the real estate industry, who warn me, “You’re going to alienate potential clients by talking about politics.”
So, if I’m generating so much concern and potential negative effects by being involved in political discussion, why do I do it?
It’s very simple: Because, virtually everything that government does has a direct and a substantial impact on the economy and the real estate industry. Consequently, one cannot possibly have an intelligent discussion about the state of any facet of the real estate industry without involving the influence of government, particularly the federal government, in that discussion.
As just one example, the present rate of the unprecedented and tremendous level of borrowing by the federal government directly influences:
1. The reduced availability of credit due to the lower volume of available liquidity (actual dollars in the system available for use); and
2. The cost of credit (interest rates) due to the increasing rate of interest that must be paid by the US government to continually attract buyers of US Treasury Notes & Bonds.
These 2 factors alone prevent private business from both expanding and modernizing; 2 major factors in sustaining existing jobs and creating new, permanent jobs (rather than temp positions, like government Census workers that will be let go in a few months).
These 2 factors also have a direct negative impact on both the ability and willingness of people to buy real estate. Let’s face it; most people have a limited financial ability to pay. So, the higher the interest rates go, the less they’re able to borrow. Then, there’s the matter of “buyer confidence.” When people are fearful for the security of their job, they tend not to make big-ticket purchases, such as a home. Thus, demand for real estate drops, and so do the prices to attract buyers.
Another negative impact from these 2 factors is an increased level of unemployment which creates 2 more subsequent negative events: 1) Higher state taxes to meet the demand for unemployment insurance, and 2) Increased levels of mortgage and other credit defaults.
The 2nd of these 2 subsequent negative events (mortgage defaults) then manifests into yet another major negative event; increased numbers of foreclosed properties due to the inability to pay the mortgage debt due to the lack of employment and lack of employment opportunity.
The increased number of foreclosures results in banks dumping property on the market creating an even greater over-supply than previously existed, which further erodes (water’s down) prices of other properties, which, in turn results in the inability to sell and create liquidity (get cash money) to either pay one’s bills or move on to another place or venture.
As you can see from this little snippet example, the actions and/or inactions of the US federal government play a direct role and cause a major influence on every facet of the real estate industry. Whether it’s single-family residential sales, commercial retail or office leasing, or industrial development; the US federal government is THE major influence.
In the end, I believe it is critically important to inform and to discuss political / economic issues with anyone who wishes to understand them. I also believe, that the better informed and the more they are able to understand the unvarnished political / economic facts that exist, the better prepared they are to make the best financial decisions for themselves.
As for where I fall in the political / economic spectrum, I’ll address that in a future post.
As always, your comments and opinions are welcomed.
