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3 Ways Sequestration Could Affect the Housing Market

by Peter Thomas Ricci

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Sequestration cuts could impact many sectors of the economy, and the housing market would be no exception.

Sequestration has been in the news quite a bit lately, and for good reason: should Congress fail to reach an accord in its budgetary disputes, automatic spending cuts will take effect on March 1 to the tune of $1.2 trillion; the cuts would be spread out over the next nine years, and would effect everything from entitlements, to defense, to finance.

Curiously, though, the impact that such cuts would have on the housing market – one of the economy’s most important and influential sectors – has been a largely ignored topic, so we wanted to spotlight three possible ways that the sequestration could affect the housing market.

Sequestration and the Housing Market

1. Government Housing Initiatives – Because the sequestration is centered on government expenditures, all of the government’s housing initiatives would take a hit if sequestration took effect; in fact, Shaun Donovan, the current secretary of HUD, told a Senate Panel last week that sequestration would be “deeply destructive” for the housing market, in that it would cut funding to programs for the homeless, Superstorm Sandy relief and the many supplements HUD provides to low income families.

2. The Mortgage Markets – According to an Ellie Mae report from last week, the Federal Housing Administration (FHA) guaranteed 23 percent of all mortgages in 2012, but as Diana Olick pointed out in a recent article, the FHA would likely lose staff because of the sequestration, and as a result would process fewer loans, refinancings and distressed properties – all areas that are pivotal to the housing market’s recovery.

Sequestration could also impact private mortgage companies, however. As Olick notes, borrowers must be employed to close on their loans, and should potential borrowers lose their jobs because of sequestration cuts, they’d likely lose their loan lock as well.

3. Confidence Game – The most notable impact of the sequestration, though, would be consumer confidence, arguably the most important component to a healthy housing market. When consumers purchase a property, it’s likely the largest purchase of their lives, and they do so in the confidence that the economy will continue to grow and that they will, as a result, make a return on that investment.

Consumer confidence fell precipitously during the economic downturn, but it had been rising the last few months; if sequestration cuts take affect, though, it could convince consumers to hold off on their home purchases, which would impact every sector in the homebuying and selling process.

Is the sequestration something you worry about in your day-to-day business? Or do you think our analysis is way off? Give us your take in the comments section.

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