Come election night, should Democrats retain control over the Senate and House, we would likely see the current administration proceed to advance items on its domestic social policy agenda which should include passing further legislations aimed at expanding the social provisions of the Inflation Reduction Act (IRA).

The IRA clean energy initiative includes energy efficiency tax incentives for rental housing providers and $837.5 million for the Department of Housing and Urban Development (HUD) to provide grants or loans to affordable housing owners. Provisions in the IRA include the extension of the 45L credit, meaning an increase of the maximum tax credit value developers are to receive for every energy efficient housing unit within their buildings, from $2,000 to $5,000. Additionally, investors would be able to take advantage of a 30% tax credit which will be applied to charging infrastructure up to $100,000 per item of property provisions. Furthermore, the package will allocate $330 million in grants to help states adopt the most recent residential and commercial building energy codes.

 Here’s What to Expect with a Democratic-Led Congress:

• Furthering of rental housing policies that place limits on the ability to collect rents. i.e.  rent stabilization and rent control policies
• Greater potential liability on developers and owners for environmental contamination
• Potential increases in compliance costs associated with numerous federal, state, and local laws and regulations
• Changes in tax rules and regulations that may affect the ability for owners to reinvest sale proceeds in a manner that generates favorable returns as 1301 exchanges may become a target for repeal or limitation
• Further tax increases on corporations

If indeed the 2022 midterm election follows precedent as a referendum on the incumbent leadership, voter dissatisfaction about sticky inflation and a slowing economy will play out against the Democratic party, likely leading to a handover of leadership to the GOP.

The Republican party gaining control of Congress, as some speculate, should have some favorable tax policy, regulatory and government spending implications for the industry. We expect a great deal of coordination on the legislative agenda, however, with President Biden holding veto power, most proposals will probably die. This outcome virtually guarantees greater regulatory action by the executive branch and additional Congressional oversight of those activities.

Even as interest rates surge and reducing liquidity in financial markets drives borrowing costs higher around the world, we can anticipate limited government policy help for inflation under a Republican-led government (Wells Fargo Investment Institute). Aggressive credit tightening by the Federal Reserve will be the main anti-inflation weapon, dampening demand and exposing the economy to a recession. The rental housing industry may have to brace itself for further volatile interest or capitalization rates and unstable capital market conditions.

Here’s What to Expect with a Republican-Led Congress:

• Attempts to advance key parts of the previous administration’s tax cuts, lowering corporate taxes to benefit investors; however, further inflationary activities may contribute to already-rising operating costs.
• Lower compliance costs associated with limited federal, state and local laws and regulations
• Potential financial re-regulation as the Biden administration leans more heavily into wielding executive powers

Based on numerous projections, an era of endless political gridlock may be imminent with the high probability of a divided government post-election. If indeed Democrats hold on to the Senate come election Tuesday, and Republicans seize enough seats in the House to take control, it could mean fewer but also less controversial laws being passed.

Under this scenario, House Republicans would be alone in pursuing their agenda and would likely end up seeing most proposed bills die at the doors of the Senate. The Republican agenda would include conducting aggressive oversight and moving forward with budget cuts for federal agencies, potentially including HUD. As a result, it is expected that the President will pivot to federal regulatory powers to implement his agenda once the legislative route is shut. 

 Here’s What to Expect:

• A divided government means greater predictability and fewer surprises in the legislature, something that the equity markets typically favor. However, this outcome makes bipartisan action against inflation very difficult.
• Policy initiative targeting housing supply issues will rely heavily on compromise between the Democrats and Republicans.
• Concerning the housing sector, a component of the original reconciliation which includes billions of earmarked funds for the construction, renovation and purchasing of affordable public housing would be unlikely to move through a Republican majority House. Republicans may either refuse to fund or underfund the Federal Housing Agency if they seize control of just the House.
• Democratic efforts to enact broader climate policies and social programs through legislation, such as pushing for renewable energy development, will not see much success.