Housing High and the Government Cliffhanger

By Ralph W. Cole Senior Vice President of Research

There’s No Place Like Home

Good news came this week when Standard & Poor’s Case-Shiller Home Price Index reported that national home prices increased 4.3 percent on average through October. 2012 is on track to be the first year of positive home price appreciation since 2006. Housing has been in bear-market territory since that time—this increase in prices is certainly a long-awaited, welcome development.

In 2012 we found a new equilibrium on supply and demand for housing. New household formations (demand) has risen from its lows to exceed new home construction (supply), resulting in a modest bump in house prices. In addition to supply and demand shifting, the housing market is benefitting from a 65-year low in mortgage rates. This week, 30-year conforming loans were quoted at 3.125 percent, prompting borrowers to ask, “How low can you go?”

We expect housing to remain one of the bright spots in the U.S. economy as we inch toward 2013. Housing starts are forecast to surpass 1 million next year, up from 475,000 in 2008, but still a long way to go from the high of 2 million we saw in 2005. Job creation from new home formation is significant for construction but also for manufacturers of goods and services associated with a new household—think carpeting, furniture, appliances, lawncare, etc. The lack of homebuilding the last five years has been a significant driver of unemployment. We expect improvements in employment in 2013 will be directly correlated to growth in housing starts.


The unfortunate part of this “Kabuki-theater drama” is that it was so predictable. As we have noted in past publications, markets stop panicking when politicians start panicking.  It appears on the eve of the “fiscal cliff” that politicians are indeed starting to panic. The House of Representatives will be hosting a special session on a Sunday night, December 30, to hopefully vote on a deal. Outcomes range from a 30-to-90-day extension of current policy (really?) to extension of Bush-era tax cuts for all with the exception of individuals earning more than $500,000 annually.

As a firm we view the entire situation as truly unfortunate. At this moment, the U.S. has an opportunity to re-establish itself as a leader in the global economy. Before this can occur, our government needs to show the world that we are capable of addressing our short- and long-term fiscal issues. The U.S. also needs to prove to rating agencies its resolve to face these enormous fiscal challenges. As of this writing, neither side of the aisle has shown the leadership to successfully put forth a solution.

Our Takeaways for the Week

  • Despite positive economic data, the overhang of fiscal cliff negotiations weighed on the S&P 500, which was down 1.9 percent for the week
  • U.S. bonds have maintained their safe-haven status with the yield on the 10-year Treasury falling to 1.69 percent