Housing Numbers and the Debt Ceiling

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House in foreclosure.

Welcome to Politics Bites, where every afternoon at It's A Free Country, we bring you the unmissable quotes from the morning's political conversations on WNYC. Today on the Brian Lehrer Show, Felix Salmon, finance blogger for Reuters, discusses the debt deadlock in Washington and why housing starts are up but home sales are lagging.

A bipartisan agreement seems to be emerging in the Senate that not only breaks the debt ceiling deadlock but would also cut $4 trillion for the national debt over the next decade and reform the existing tax code.

Felix Salmon said while that may sound hopeful, it’s still not clear what’s in the deal.

It’s incredibly vague. There are promises to cut spending... at some point in the future, and we’re not quite sure how but we’ll commit ourselves to doing it. So I think a bunch of this is sort of saying we want to cut the deficit, but we’re not quite sure how, but we’ll commit ourselves to doing it in the future, but first lets get this debt ceiling issue out of the way.

He said it is promising that there seems to be genuine bipartisan agreement. Senator Mark Warner (D-VA), interviewed on All Things Considered yesterday, said that the agreement would actually lower top tax rates while simultaneously closing a lot of existing loopholes, giving both parties the ability to claim victory.  

Any agreement that increases tax revenue through closing loopholes while lowering the top tax rates is closing some large loopholes indeed, and in fact is likely going to be addressing not just loopholes but standardized deductions. Additionally, the $3 trillion in spending cuts indicates a new bipartisan willingness to cut into Medicare entitlements. Salmon is skeptical that the agreement will be sustainable.

I think both parties are in on a conspiracy to claim that they will magically find Medicare cuts, somehow. And as long as they claim that with a straight face they’ll agree to pretend to believe each other, at least until we can get to the other side of this debt ceiling vote, and then they’ll have a big fight.

He said no one in the House seems able to reliably deliver the votes for any plan, and that poses a real problem, given how soon the deadline looms.

There’s a lot of things which the House Republicans can suddenly wake up and decide they don’t like. If they think that they have twelve or thirteen days left to do this, if it doesn’t work, if something goes wrong in the House, there’s no time left to scramble together some kind of a plan B.

Stimulus has noticeably been left out of the conversation. The political unpopularity of the concept, especially in the House, makes it likely that any stimulus the president would be able to get passed would be too small to have any significant effect. Salmon thinks leaving out stimulus is a mistake.

The way you get the economy moving is not by cutting spending. Clearly what we need is stimulus… and there is absolutely no indication that it is a remote possibility.

Existing home sales number released today show a small decrease in June, of 0.8 percent. They were down almost four percent in May. Salmon said these numbers were much worse than expected. He said 0.8 percent is actually significant because it indicates that the market is not rebounding, as was expected, but continuing to fall.

Local housing numbers also show a decrease, with the median housing price in the New York City metropolitan area dropping from $414,000 to $401,000—a three percent decline. Sales also fell, with a seventeen percent decline in sales in June in this area, compared to last year’s June.

Salmon pointed out that this is especially bad given that last year’s June was also depressed for sales.

Every time the housing market plunges everyone gets this big hope that, hey, we’ve had this big plunge and now we can have what is known as a means reversion—we can bounce back, because this is such a low figure. And every time we think we’re going to bounce back, it just gets worse.

He said you cannot build equity in that sort of decline, which leads to more homeowners ending up underwater with their mortgages, and fewer people buying, and thus more delinquencies and foreclosures.

Yet housing starts were up. Housing starts numbers refer to ground-breaking on new housing projects. Salmon explained that most of these were in multi-family homes, indicating rental units.

What builders are seeing… is that people are getting over this American dream of homeownership. They realize it can turn into much more of an American nightmare—that a house, in reality, is much more of a liability than an asset, and people prefer to rent than to own.

Thirty percent of the sales were of distressed homes, the majority of which are most likely short sales by mortgage-holders who are underwater. While this might seem, on the positive side, to serve as a purging out of some of the most overpriced stock, Salmon does not think it will lead to more affordable housing. Many of the sales were cash, meaning the buyers were likely speculators planning to get their return in rent.

The relationship between the depressed housing market and people’s ability to find jobs is also important in interpreting the housing numbers.

Home ownership is antithetical to labor mobility. If you own your home, and especially if you’re underwater or it’s difficult to sell your home, then it’s very difficult to move to where the jobs are. If you rent it’s much easier. So in terms of improving the employment picture, what we want is exactly what we’re seeing.