Debt Ceiling Debate Could Hurt Housing

The bitter Congressional negotiations that led to a temporary raising of the debt ceiling last week may have a lingering effect on consumer attitudes and spending may pose significant downside risks to economic activity in the current quarter, Fannie Mae’s chief economist said.

Growth slowed in the third quarter, although recent fiscal risks threaten a previously expected pickup in growth in the current quarter, according to Fannie Mae’s Economic & Strategic Research Group. Consumers remain key to the outlook, but factors such as the recent federal government shutdown and the furlough of 500,000 workers, as well as the debt ceiling debate, which was resolved temporarily on October 16, appear to be weighing on consumer confidence and tempering real consumer spending. As a result of the fiscal events and the slowing momentum in economic activity from the second quarter to the third quarter, full-year growth is expected to come in at 1.9 percent, a slight downgrade from 2.0 percent in the prior forecast.

Fannie Mae’s October economic and housing forecast is largely unchanged from September’s forecast as it anticipated the modest levels of consumer spending seen toward the end of the third quarter.

However, fiscal uncertainties associated with the federal government shutdown, the protracted negotiations to raise the debt ceiling, and the timing of the Federal Reserve’s tapering of its asset purchase program, pose,” said Fannie Mae Chief Economist Doug Duncan.

“Our October economic and housing forecast is largely unchanged from the previous forecast as we anticipated the modest levels of consumer spending seen toward the end of the third quarter. However, fiscal uncertainties associated with the federal government shutdown, the protracted negotiations to raise the debt ceiling, and the timing of the Federal Reserve’s tapering of its asset purchase program, pose significant downside risks to economic activity in the current quarter,” said Fannie Mae Chief Economist Doug Duncan. “In particular, the contentious Congressional negotiations that led ultimately to Congress raising the debt ceiling may have a lingering effect on consumer attitudes and spending, as was seen following the 2011 negotiations,” Duncan said.

“On the bright side, these fiscal policy issues appear to have had only minimal effect on the housing market to date, which continues to improve overall,” said Duncan. “Notably, the rapid appreciation of home prices during the past year has contributed significantly to household net worth gains and may help to cushion some of the fallout from the fiscal policy debate. Also, the Fed’s continuation of securities purchases will likely keep mortgage rates low, enabling more homeowners to take advantage of refinance opportunities.”

Fannie still forecasts that total sales will end the year at 5.549 million units and home prices will rise 8.3 percent on the FHFA index.