RSSCongress Plans Stimulus to Slow Economic Growth
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The construction industry will get a boost at midyear from the $150 billion economic stimulus package that Congress is now debating, if the stimulus package is enacted. It will include accelerated depreciation for capital investment, possibly tax loss carry backs for unprofitable firms to recoup earlier income tax payments from the boom years and personal “tax rebate” checks in the late spring and summer that could be as high as several thousand dollars for working families with several children.
The package also includes nearly doubling the size of mortgage loans that FHA can guarantee and temporarily boosting Freddie Mac and Fannie Mae mortgage loan limits from $417,000 to as much as $730,000. This will be the first positive impact of the package. It will quickly eliminate the current 50-100 basis point premium for mortgages in the $417,000 to $730,000 range and reduce the premium for even larger mortgages.
Past experience with rebates suggests a significant boost to consumer spending as well as lots of debt repayments that will ease the imminent problem of home foreclosures as adjustable and teaser rate subprime mortgage rates reset higher. Home remodeling will get a very significant boost from the large majority of households now comfortably paying their fixed rate mortgage. Home sales will get a boost, especially very low and very high prices homes although it will take longer to appear in the middle of the price range.
However, the excess inventory of homes for sales should drop measurably very quickly from the combination both of more sales and of fewer homes being listed for sale due to foreclosure or the threat of foreclosure. This will slow the decline in home prices and shorten the wait for the bottom in prices that many prospective buyers are waiting for.
Consumer confidence will begin to rise as soon as the checks are known to be coming. Depressed confidence is now the principal restraint on home sales and hence new home construction. The major impact of the rebates will be at the low end of the market where a check for $1,200 or more is a very significant share of disposable income.
Reed Construction Data’s forecast already assumes a smaller economic stimulus package and will be adjusted as soon as the details of the stimulus package become clear together with a majority to enact the plan.
Is the rebate plan good for construction and the economy over the long term? Probably not. There are excesses in the economy that need to be fully reversed before sustainable economic growth at a 3% or better pace can begin again. The massive subprime mortgage losses need to be swallowed by lenders so the weak ones can be weeded out and the strong ones can recapitalize and position themselves for new period of sustained growth. The rebates could delay this needed process giving us only a short burst of growth than can not be sustained.
Many of you will get little if any rebate. Congress should look up “rebate” in the dictionary. The term does not include taking taxes paid by wealthier people and mailing out check to people who paid little if any taxes. The proposed 2008 rebates are different than the last rebates that did include high income taxpayers. The current plan to engineering a massive redistribution of income during the election campaign could stall the economic stimulus in an ugly political debate.
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Member Comments
How can Mr. Haughey seriously think that this rebate is going to improve consumer confidence? The unemployment rate has risen to 5% from 4.4% a year ago. Are people going to buy a new house when they see their neighbors losing their jobs and they fear losing their own?
The Conference Board Consumer Confidence Index reports that consumers’ “assessment of the job market, while slightly less negative than in December, is more negative than a year ago. Looking ahead, consumers are quite downbeat about the short-term future and a greater proportion expect business conditions and employment to deteriorate further …
When Jim Haughey says, “Many of you will get little if any rebate”, it is only true if many of you earn more than $174,000, the phase-out limit for the program. A couple with income of, say, $145,000 would get the maximum rebate of $1,200 plus $300 per child.
In addition, his description of the rebate program as “taking taxes paid by wealthier people and mailing out check [sic] to people who paid little if any taxes” is also inaccurate. The more taxes you pay, the higher your rebate, up to the phase-out limit. Someone who earned $9,000 and …
