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Housing recovery imperiled by bumbling Congress?

Posted by Scott Van Voorhis  October 2, 2012 06:28 AM

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The looming federal "fiscal cliff" could snuff out the budding real estate recovery unless Congress gets off its duff and acts soon, a report just out this morning warns.

If Washington fails to hammer out a compromise on the nation's mounting debt obligations, a series of draconian budget cuts and tax hikes will kick in next year.

Economists are already warning of another recession should budget Armageddon erupt, but the real estate market would go right over the fiscal cliff along with it, contends market tracker Clear Capital in a report out this morning.

"We've turned our focus to the impending fiscal cliff," said Dr. Alex Villacorta, Director of Research and Analytics at Clear Capital, in a press release. "With forecasted gains of 2.2% over the next six months, the threat of the fiscal cliff could throw a wrench into the recovery."

In fact, even protracted negotiations - and weeks of scary headlines - could be enough to scare buyers back onto the sidelines, Clear Capital argues. And the timing could not be better, with buyers just now getting back into the market, jamming open houses and competing for the most desirable properties.

"If the cliff is avoided, we still run the risk of damaging confidence with a resolution pushed against year-end deadlines," Clear Capital's Villacorta said. "Confidence is key to turning the recovery's near term sprint into a marathon. The sooner businesses and consumers are reassured, the more likely they are to build, purchase, or loan on a house."

If this doomsday scenario does play out, it would not be the first time Congress managed scare the wits out of prospective home buyer and sellers.

The long and torturous debate over a potential national bankruptcy in the spring and summer of 2011 put a big dent in consumer confidence - and helped further grease the way down for already falling housing prices.

Here's more from today's Clear Capital report:

"The debt ceiling debate last year highlighted how dangerously close lawmakers are willing to come to deadlines before reaching an agreement. Consumers reacted negatively to the high level of uncertainty with a 14.3% drop in sentiment, the largest since the end of the recession. At the same time, home prices were experiencing the worst annual declines since the bottom of the market in 2009. In May 2011 the debt ceiling debate started to heat up, while home prices dropped 6.8% year-over-year. Annual home price declines persisted through 2011, hung over from the expiration of the first-time-home-buyer tax credit and the drop in consumer confidence. Prices finally saw relief in early 2012, following improvement in consumer sentiment."

And of course, who could forget the ridiculous first-time buyer tax credit? That $8,000 incentive championed by Congress and real estate market boosters backfired in humiliating fashion.

The credit managed to pull forth demand as buyers scrambled to meet the April 2010 deadline, creating the illusion of a market recovery. But then the inevitable happened - sales plunged when the tax credit expired, sending home prices into a double dip they are just starting to pull out of.

It's a hard act to top, but with Congress, anything is possible.

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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About boston real estate now
Scott Van Voorhis is a freelance writer who specializes in real estate and business issues.

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