NFIB Small Bussiness

  • Over the Cliff? More or Less, Yes

How long can we finance one-thid of our government’s spending by borrowing money? Many countries in Europe have found their answers.

By Bill Dunkelberg

As most expected, Dec. 31 came and went with no resolution to the so-called “fiscal cliff.”

In usual panic, last-minute mode, Congress agreed on tax rates. That was a pleasant surprise of course, but taxes also went up. The income tax increase for those earning more than $400,000—the rate rose from 35 to 39.6 percent—will garner only about $60 billion annually (assuming people don’t find ways to evade higher taxes, which they always do). This is a drop in the bucket compared to the $1 trillion deficit in the budget.

Add that increase to the extra taxes imposed by the healthcare law on high earners (3.8 percent more for capital gains earnings above $200,000), medical devices, tanning salons and so on. The top estate tax is now 40 percent on estates worth more than $5 million, indexed to inflation. Some popular tax extenders were given another year of life, and the alternative minimum tax was permanently fixed.

Still, none of this will do anything to put a dent in the deficit and debt that continues to pile up. And, the fiscal cliff deal did nada to address spending.

Indeed, nothing was done other than kick the can down the road to this spring, pushing the mandatory “sequestration” cuts right into the debt ceiling debate. The administration expects, of course, to not make cuts in anything. That would be too painful. Rather, the indication is that more attempts will be made to support spending with even more tax hikes. The Senate (and therefore Congress, as a whole) has not passed a budget in almost four years.

This is the Greek railroad, government-owned business model small business owners feared. How long can we finance one-third of our government’s spending by borrowing money? Many countries in Europe have found their answers—they are in recession now and can’t use someone else’s money to support their spending. Big picture, this is a negative for the economy. Raising taxes and cutting government spending will have an adverse impact on GDP growth. People will have less after-tax income, and lower government spending means somebody’s income, whether doctors or defense contractors or federal employees, is smaller.

Think of it this way: In a world where governments balance their budgets, cuts in government spending are supposed to mean tax cuts, adding money back to the private sector to spend and pick up the slack. But when we borrow $1 trillion every year to support spending, government cuts reduce incomes, but don’t reduce taxes dollar for dollar. They merely reduce borrowing (from China, for example). Thus, there is no boost to the private sector.

Resolving the uncertainty about tax rates is a positive. Owners make decisions to invest in their businesses or hire new workers based on after-tax profits. Knowing these rates is important, even if they are higher for some.

But, this will not offset the negatives that will result from our current fiscal mess. Add to that the flow of new regulations now being released (probably held back until after the election), and it will be a tough year. Nothing is changed on Capitol Hill. Check out the Sandy Relief Bill, which stalled while people suffered because so much pork had been added that is irrelevant, expensive and unnecessary.

Americans voted for more of the same and they’ll probably get it, leaving 2013 looking pretty much like the year we just left behind.


Housing Fundamentals Suggest Solid 2013 Recovery

Fannie Mae’s economists said on Thursday that, despite the feeble note on which 2012 ended, the economy has the building blocks, including housing, for strong growth.  Housing is now on a sustained growth path as are manufacturing and energy production but, given circumstances in Washington, Doug Duncan, Orawin T. Velz, and Brian Hughes-Cromwick said they see no reason to revise their forecast from January.  They said, however, that if their forecast is wrong it will be erring on the side of being too conservative.

Housing underpinned the broader economy in 2012, particularly the pickup in home construction. However home sales weakened and leading indicators such as pending home sales and building permits also pulled back, suggesting some softening momentum in the near term. Aside from the month-to-month volatility, all housing indicators performed quite well in 2012 compared with 2011, and housing fundamentals suggest a continuing solid housing recovery this year.

There was a general consensus that home prices bottomed earlier in the year and continued to build momentum, exhibiting robust year-over-year gains unseen since the housing boom, even during the traditionally weaker winter months.  The seasonally unadjusted CoreLogic house price index rose 0.4 percent in December from November, and 8.3 percent from last year-the biggest gain since May 2006. Home prices end year – p 5 (link below)

The dwindling inventory of homes available for sale, now at the lowest level since December 1994, is the main driver of rising prices.   Delays in the foreclosure process and strong investor demand have greatly reduced the inventory of distressed properties and the sales share of these properties dropped to 24 percent of existing homes sales at the end of 2012 from 32 percent a year earlier.  A shift toward short sales also has helped boost home prices.

Positive home price expectations are a crucial factor for a continued broadening housing recovery. The Fannie Mae January National Housing Survey showed consumer expectations for home price increases hovering near the strongest levels recorded in the survey’s two-and-a-half-year history. Such expectations provide an incentive for potential homebuyers to get into the market especially as many also expect interest rate increases.

Continued lean inventory and the increase in the rate of household formation as the labor market improves bode well for homebuilding activity and residential construction employment. The economists say they expect housing to be a bigger contributor to growth going forward. So far in the housing recovery, multifamily building has been a brighter spot than the single-family segment.

Quote for today:

“The problems we face today are there because the people who work for a living are now outnumbered by those who vote for a living.”




Is the Downsizing Trend Fading?

Daily Real Estate News | Tuesday, February 21, 2012

Homes are getting bigger again. Census Bureau data shows that 2011 home starts were bigger with more features and amenities than those built in 2010.

According to the data, the average new-home size grew from 2,381 square feet in 2010 to 2,522 square feet in 2011. Forty-two percent of the new homes had four or more bedrooms, and 28 percent of the new homes had three or more full bathrooms.

However, housing experts are quick to point out that home construction last year saw its worst year on record, so the characteristics of new homes from last year is being pulled from a much smaller pool of homes than previous years.

Also, the average sales price for a new home also increased last year, going from $264,900 in 2010 to $274,400 in 2011.

Source: “Size Matters: Newly Constructed Home Trends in 2011,” RISMedia (Feb. 16, 2012)