How the Fiscal Cliff Could Kill the Housing Recovery
By BRIANNA EHLEY,
Posted: October 03, 2012
Just when it looked like the much-battered housing market was making a comeback, industry home-sale monitor Clear Capital predicts that the market will begin to lose its momentum if Congress does nothing to avert the fiscal cliff, according to a report by The Oregonian’s Elliot Njus.
"Confidence is key to turning the recovery's near term sprint into a marathon," Alex Villacorta, Clear Capital’s director of research, told the newspaper. "The sooner businesses and consumers are reassured, the more likely they are to build, purchase, or loan on a house." And by reassured, he means hearing from congressional leaders and the White House that the economy won’t get clobbered by a mix of $607 billion in tax increases and spending cuts in early January.
In an upbeat report, CoreLogic, an organization that analyzes real estate data, said, “Home prices nationwide, including distressed sales, increased on a year-over-year basis by 4.6 percent in August 2012 compared to August 2011. This change represents the biggest year-over-year increase since July 2006.” Sounds like we’re crawling out of the woods. But the numbers don’t include distressed sales due to foreclosures or bankruptcies.
Perhaps more important, super low mortgage rates haven’t spurred a rush to buy as consumers anxiously await solutions to the fiscal cliff. Will their taxes rise? Will their jobs be cut because of mandated budget cuts? Will they be able to afford new houses in light of this uncertainty? About 22 percent of U.S. homes with a mortgage – or 10.8 million properties – remained “underwater” in the second quarter of the year. Read more at The Oregonian
KRUGMAN JUMPS OUT OF BED OVER NYT REPORT
The New York Times reported early Tuesday that Senate leaders are working on a plan to avert the fiscal cliff that may end up looking similar to the Simpson-Bowles fiscal commission plan, which includes changes to Social Security and major cuts to federal programs. The Times’s liberal columnist, Paul Krugman, was so incensed by the report that he jumped out of bed at 3 a.m. Tuesday to write in his blog that such a plan would be “politically stupid and a betrayal to the electorate.” Read more at The New York Times
CUT ENTITLEMENTS, RAISE TAXES TO AVERT THE CLIFF
Before we jump off the cliff head first, the editors at Bloomberg have a plan: a 3-to-1 spending cuts to tax increases mix that they say should be signed, sealed and delivered by August 2013. They offer a 10-year roadmap:
-- Raise the retirement age to 69 from 66. Adding one month every two years would bring it to 69 in the year 2075. Eligibility for Medicare benefits should also rise. Savings: $249 billion.
-- Require more Medicare cost sharing. Congress could discourage overuse by increasing deductibles and co-payments. Means-test Medicare benefits so that the well-to-do elderly pay more. Savings: $353 billion.
-- Shrink COLAs. Replace the Consumer Price Index overstates the cost of living by not accounting for the cheaper product substitutions consumers make when prices rise. A better index, the “chained CPI,” captures such behavior. Savings: $232 billion.
-- Raise taxes on the wealthy. The Bush tax cuts should be allowed to lapse for household earnings above $250,000. Congress should also adopt the Buffett rule, requiring millionaires to pay at least 30 percent in income taxes. Savings: $740 billion.
-- End corporate tax breaks. Many deductions and exclusions serve no public purpose. We would end the 15 percent rate on profits earned by managers of private-equity firms. Other options include abolishing a tax break for last in, first-out inventory accounting and cutting oil and gas subsidies. Savings: $160 billion.
-- Overhaul other government programs. Congress should eliminate some farm subsidies, reform the military pension system, require federal employees to contribute to their pensions at levels similar to private-sector workers, and have the U.S. Postal Service go to five-day delivery. Savings: $213 billion. Read more at Bloomberg.com
JOB GROWTH SLOWS AS FISCAL CLIFF NEARS
With businesses focusing more and more on the looming fiscal cliff, U.S. job growth is likely to improve only slightly, Reuters’ Lucia Mutikani reports. With unemployment holding relatively steady at 8.2 percent in September, businesses are wary of hiring additional employees because of uncertainty over the tax picture next year. according to a Reuters survey. Read more at The Fiscal Times
SMALL BUSINESSES CAN WEATHER THE STORM
The president of San Diego-based Sentek Global tells the Washington Post that while he doesn’t expect a worst-case scenario in January, he and other small business leaders still have time to prepare for the possibility that Congress and the administration can’t work out a tax and budget deal by the end of the year.
“Bottom line, we hope and expect cooler heads to prevail and a resolution to come quickly after the election,” Eric Basu writes. “If it doesn’t, we can weather through a short period without making any significant changes, but will most certainly have to reevaluate our strategy if for some strange reason sequestration became the norm for a good chunk of 2013.” Read more at The Washington Post
IRS COULD BUY CONGRESS MORE TIME
The Wall Street Journal’s John McKinnon examines how the Internal Revenue Service and the Treasury Department could resort to some administrative tricks to blunt the effects of expiring tax cuts while Congress figures out what to do: “If the current tax breaks expire on Dec. 31, but tax administrators decided to leave withholding at current levels, some tax experts say that could cushion the economic blow considerably at the beginning of next year, and give Congress more time to reach a compromise.” Read more at The Wall Street Journal
ECONOMY ALREADY FEELING EFFECTS OF THE CLIFF
The good news is that all 17 economists surveyed by CNN Money are convinced Congress wouldn’t let the economy plunge off the fiscal cliff. The bad news is that businesses have already begun pulling back as a precaution, CNN Money’s Chris Isidore reports. “Some economists said there already has been damage just from the risk posed by the fiscal cliff,” Isidore writes. “Several economists suggested businesses have likely started to defer hiring and major capital expenditures just to make sure the worst doesn't happen.” Read more at CNNmoney.com
CITI: LOOMING CUTS CREATING CAUTIOUS POSITIONING
Citigroup investor polling data shows that investors are already concerned about the looming fiscal cliff contributing to more cautious credit market positioning as the year draws to a close, Barron’s Michael Aneiro reports. “The fiscal cliff has likely contributed to more cautious positioning heading into year end…. In our conversations with accounts, we are finally hearing some investors reduce risk over concern about the scheduled fiscal adjustment in 2013.” Read more at Barron’s