LOS ANGELES, Nov. 15, 2012 /PRNewswire-iReach/ -- If you've been paying any attention to the news over the past few months, you've heard the term "fiscal cliff". It has become the buzzword that politicians and news anchors are using to describe the looming financial crisis that President Obama and Congress will have to address in early 2013. Congress will have to decide if they want to extend Bush-era tax cuts or allow them to expire. And, in addition to the tax hike decision, they will also have to address a series of automatic spending cuts. Depending on the outcome of their vote, the nation's entire economy will be affected.
Many economists fear that if lawmakers in Washington don't do something quickly, the country will head into another recession -- while we try to pick up the pieces from the first economic collapse. So what would that mean for the U.S. housing market, which has been showing signs of recovery in recent months? While no one knows exactly how severely going over the "fiscal cliff" and heading into another recession would affect the housing market, experts all agree it would definitely have a negative impact. If Congress fails to address the automatic tax increases and spending cuts that are set to go into effect on January 1st, the "fiscal cliff" would likely affect the stock market, mortgage interest rates, unemployment rates, and home buyer and lender confidence in the months to come.
Tax increases and spending cuts would shock the stock market, affecting global banks like Goldman Sachs, Morgan Stanley, Bank of America, and Citi. Analysts from the financial services and research firm Keefe, Bruyette, and Woods say falling off the "fiscal cliff" would also affect the 10-year Treasury, which would in turn, endanger the large refinance wave that is currently helping to boost the economy's recovery. In addition to refinances, new mortgages would likely decrease, because lenders would become more apprehensive about approving loans. During times of financial uncertainty, companies are more likely to lay off employees, therefore, the unemployment rate would also increase. With fears over job security, fewer Americans would feel financially stable enough to purchase a new home -- meaning they would be less likely to apply for a mortgage. Fewer mortgage applicants, combined with stingier lenders, means home sales would drop off. The number of listings would likely increase, including foreclosures and short sales, while the median sales price would likely decrease, after both of those statistics started to show slight improvements toward the end of 2012. So, how can the "fiscal cliff" be prevented?
The Federal Reserve has been trying since September to keep mortgage rates low by purchasing $40 billion a month in mortgage-backed securities. The long term effects of that stimulus plan is yet to be determined, and some financial experts say just because mortgage money is available, it doesn't mean Americans are actually going to borrow it. If the economy collapses again, even low interest rates might not be enough to entice prospective buyers into signing the paperwork for a new home loan. If Congress addresses the "fiscal cliff" and takes steps to correct the situation before the tax hikes and spending cuts go into effect, all of this could be averted. As long as the stock markets do not freeze up -- which would shut down trading volumes and investment banking activity -- a recession could be avoided. If we can avoid going over the "cliff", the housing market in this country could continue to see improvements in 2013, but if another economic recession occurs, real estate and mortgage banking will be among the several industries that could suffer a severe blow in the year to come.