Analyst: Will housing fall off ‘fiscal cliff?’
August 24, 2012
Orange County Register
Housing has become the “comeback kid” lately as U.S. new home sales increased in July and its inventory dropped. Meanwhile, the nation’s resale activity also increased in July, while the low supply of homes helped to finally push up home prices. Headlines abound lately pointing to a stronger housing market.
But risks remain and chief amongst them is the so-called “fiscal cliff.”
If Congress doesn’t act to fix the “cliff” by the end of this year, housing could be affected negatively. The “fiscal cliff’ has been in the news lately as the Beelzebub which pushes the economy back into recession in the first half of 2013. According to the Congressional Budget Office (CBO), which tends to be selectively ignored by Republicans and Democrats except this time, the US economy could drop by 2.9% in the first six months of 2013. This would mean a recession next year and if this happens, a housing set back is virtually guaranteed — since the economic slowdown would occur during the all-important spring homebuying season.
What is the “fiscal cliff”? Generally speaking, it is a combination of “substantial changes to tax and spending policies” — says CBO. It’s close to a $600 billion drag on the economy, which all might begin to hit the economy by New Year’s Day 2013 or sooner, because expectation are already changing. They include, in case you haven’t heard, according to J.P. Morgan analysis:
• $98 billion of spending cuts thanks to the “compromise” of the Budget Control Act.
• $280 billion of tax increases thanks to the sunsetting of the Bush tax cuts, which includes increases in the tax rate on the long term capital gains tax and qualified dividends.
• $125 billion from the expiration of the Obama payroll-tax holiday.
• $40 billion from the expiration of emergency unemployment benefit.
There may be other changes. The U.S. Chamber of Commerce mentions marginal tax rate increases, the lowering of child tax credits, the expiration of the marriage penalty elimination etc. In other words, Thor’s hammer banging on the head of an already weak U.S. business climate and consumer.
The whole world is looking at this with amazement. People wonder the tolerance of the American voters for self-inflicted wounds are. Clearly, voters — and for that matter economists and business people — must expect that stopgap measure must emerge out of the political confusion.
If it doesn’t happen housing could be like Terry in the 1954 movie On the Waterfront: ”You don’t understand I could’ve had class, I coulda been a contender, I could’ve been somebody …”