John M. Lee: Effect of Politics on Real Estate

As the primaries continue on the East Coast, with Democrats hoping to topple President Bush this November, let's look at how presidential elections affect real estate and what we can expect this year in the real estate market.

I have commented numerous times in this column that incumbent presidents do all they can to insure a strong economy during election years. This helps their re-election bid.

President Bush's actions this past year illustrate this point well. Our economy has rebounded from the recession of 2001. During the third quarter of 2003, our nation's output of goods and services rose at a red hot 8.2 percent annual rate. Inflation is under control. Interest rates are at 40-year lows and Bush pushed a large tax relief package through. These two events will help to stimulate consumer spending, boosting the economy. Federal expenditures have increased to fund defense and NASA space programs. The dollar is lower, encouraging more exports. It seems like President Bush has done all he can to make sure the economy is firing on all cylinders heading into the election this year.

The only blemishes are that unemployment is still a little high and the federal deficit is high. But, hopefully, with the economy rebounding, these lagging indicators will follow suit.

But specifically, how do the presidential election and Bush's fiscal and monetary policies affect our housing market? I went to the archives and researched the historical returns of the Dow Jones Industrial Average (DJIA) and the rates of housing appreciation in California and also in the Bay Area. The data are presented in the attached chart. I used DJIA and California single-family home data from 1968 to the present, but was only able to find appreciation numbers for San Francisco from 1982 to the present. Nevertheless, it gives us a correlation on how well the economy and our real estate market performs, with respect to the presidential cycle.

Presidents serve four-year terms and want the economy to be performing well going into election years.

Remember the phrase, "It's the economy, stupid." I have been reading about it more and more lately, and I am sure that President Bush is well aware of it.

If you look at the chart, the number that jumps out is that the return on the DJIA averages 19.34 percent during the presidential pre-election years, more than twice as high as any other year.

And then during election years, it averages 9.31 percent, and substantially lower in the midterm years. This confirms our supposition that there is a conscious effort to bolster our economy going into the election.

If we examine the home appreciations in California and San Francisco, the two best years are election year and the year after. This is also logical as real estate is a lagging indicator, meaning that it will go up after the economy has rebounded, and that jobs have been created. Real estate appreciation is usually the function of a strong job market. Thus, if we believe what history is telling us, we should have good appreciation this year and next in real estate.

2004 has started with a bang in our marketplace, with lack of inventory, low interest rates, and a rebounding economy with hopes of more job creation in the near future. I have already seen quite a number of multiple offers and prices higher than at the end of last year. So I expect this will be another banner year.

Interest rates will go up a little by the end of the year; most economists are predicting 30-year mortgage rates in the 6.5 percent range, about half percent higher than they are now.

Our market can live with that without any major problems. Terrorism seems to be under control. There are no foreseen issues that can bring the market down at this time. Real estate in the San Francisco Bay Area is also firing on all cylinders. And with the lack of inventory, supply and demand dictates that prices will continue to appreciate.

John M. Lee is a top-selling broker at Pacific Union specializing in the Richmond and Sunset districts. For questions about real estate, call him at (415) 447-6231 or e-mail him at johnlee@isellsf.com.