Housing forecast clouded by uncertain fiscal policies

Debt ceiling debate weighs on potential homebuyers

The housing market felt the impact of the government's temporary shutdown and debt ceiling negotiations in October, with problems expected to linger well into next year, the November Fannie Mae economic outlook report revealed.    

But the deal ceiling debate may not be disappearing anytime soon.

"By the Congressional Budget Office’s estimate, the Treasury might be unable to fully pay its obligations starting in March, but depending on the timing and magnitude of tax refunds and receipts in February, March, and April, the Treasury might be able to continue borrowing into May or early June," Compass Point Research & Trading said. 

Due to the overwhelming amount of unresolved fiscal and monetary policy decisions weighing on consumer confidence, market volatility is expected to continue into the coming months, with only modest economic growth of approximately 2% for 2013, Fannie Mae explained.

"The November economic and housing forecast reflects many of the themes we saw last month, specifically regarding the effect of the policy decision process on consumer attitudes," said Fannie Mae Chief Economist Doug Duncan.

However, the report is not all bad: economic growth is expected to reach 2.5% in 2014 once fiscal drag wanes and labor market conditions improve.

In addition, fiscal policy discussions are projected to surge in the coming weeks, with Compass Point believing that a budget deal will emerge in early 2014.

The budget committee has a soft deadline of Dec. 13, but there is no immediate penalty for inaction. Then on Dec. 31, 55 tax provisions are expected to expire, but the bulk of those provisions can be altered retroactively.

"Once again we must look further ahead in the calendar for a 'must act' date. Without Congressional action the federal government will face another shutdown on January 15, 2014," Compass Point said.  

As a result, Compass Point suggests that a narrowly tailored deal will emerge in advance of the January 15 deadline, and it will include enough budgetary savings to mitigate the effect of the 2014 sequester by maintaining 2013 spending levels.

Meanwhile, sentiment toward housing was pushed down following the government shutdown and debt ceiling debate.

Fannie Mae’s October National Housing Survey found home price growth expectations continuing to moderate as the share of consumers who expect home prices to go up in the next 12 months fell sharply.

"Monthly data showed weakening momentum in real consumer spending and suggest a reluctance among consumers to take on more debt," Duncan said. "Notably, third quarter data show that consumption grew at 1.5%, which is significantly lower than the average annual increase of 3.4% between the end of World War II and the year 2000."

"The modest consumer spending levels in recent months are consistent with the bearish trend in consumer confidence, which dropped significantly in the fall amid the fiscal standoff," he added. "Since many remaining policy decisions will spill over into the beginning of next year, it seems likely that both consumers and businesses will continue to pull back in the interim, lending to increased volatility in the markets."

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