Housing Continues to Build Momentum
Expectations for home sales and new home construction have increased considerably in recent months as the underlying fundamentals have improved. Housing is one of the few areas of the economy that has been left essentially unshaken by the uncertainty surrounding the fiscal cliff. We have repeatedly noted that home sales and new home construction will almost certainly strengthen in 2013, even if overall economic growth decelerates. This apparent contradiction owes itself to the slow but steady improvement in the operating fundamentals for the housing market, including 33 straight months of private sector job growth and rising housing formations. Steady buying by investors has also helped reduce distressed home inventories. With supplies dwindling, home prices have improved across much of the country, which is helping bring tradeup buyers back into the market. Credit availability remains a hurdle, both for buyers and builders, but this headwind has also eased a bit and should improve further in 2013.
While housing appears to be primed for a better year, the broader economy clearly faces challenges, particularly at the start of the year. We expect the fiscal cliff negotiations to be resolved in a way that results in higher taxes for those earning more than$250,000 a year. The temporary two-percentage point reduction in the Social Security payroll tax also will likely not be renewed, which will hit middle income households. The sequestration will likely be postponed, which means further changes to tax policy are likely forthcoming.
Economic activity has pulled back a bit ahead of the fiscal cliff talks. The change is most evident at the corporate level, where businesses have scaled back capital spending and hiring. By contrast, consumer sentiment and homebuilder sentiment have both held up relatively well. It is as if the economy were approaching a speed trap, where the speed limit was unknown, and everyone has collectively slowed down to a barely perceptible pace. Once we know what the rules of the road are, activity is likely to pick back up again.