July 23, 2011 – 12:02 p.m.
Political Economy: Recovery at Risk
By John Cranford, CQ Columnist
As if lawmakers needed another reason to avoid a default on the federal debt, there’s evidence that the country’s long real estate nightmare may be coming to a close. The housing market might not only be on the verge of bottoming out, it might soon start heading back up — that is, unless interest rates get hammered by another financial crisis.
Interactive: Housing Recovery May Be on the Horizon
There’s the rub. As lawmakers have pulled and hauled in recent weeks to negotiate a way to trim federal government borrowing, the deadline has grown very close for raising the debt limit to avert a default that might make the United States resemble Greece.
For Congress to drop the ball — or even to punt in such a way that unsettles global investors — would risk a terrible setback to the broad economy, which remains precariously perched. A stumble by lawmakers might prove even more disastrous for housing, which most experts say is years away from fully recovering from its deepest crash since the Great Depression.
On the other hand, solving the immediate debt crisis would remove for now most of the danger that decisions being made in Washington might add to the economy’s troubles.
The fact is, many economists remain optimistic that growth is poised to accelerate, if just a bit. For every lousy indicator these days, there seem to be two others that provide a ray of hope that the recovery is gaining strength.
Take last week, for instance, which was filled with good news, particularly on the housing front.
The Census Bureau reported that in June builders began construction on new houses at the fastest pace in five months. June was the third-strongest month for new construction since November 2008, with housing starts recorded at an annual rate of 629,000 — 17 percent more than in June 2010. Because contractors rarely build on speculation any more, that means buyer interest was growing in the late spring.
The pickup in construction was measured in every region. And perhaps more telling, the number of permits for new houses also rose significantly, which means this trend of increased construction is likely to continue.
Also, the National Association of Realtors reported that the median resale price for single-family houses jumped in June to $184,300, the highest since October 2008. Home resales, which are still driven in part by foreclosures, declined a bit for a second month. But resales were higher in the South and the Midwest.
And the Mortgage Bankers of America reported that applications for home loans surged by more than 15 percent, the result of a huge jump in the number of refinancings.
Political Economy: Recovery at Risk
There were other mixed signals about the economy last week, too.
New claims for unemployment benefits rose again, the Labor Department said, evidence that the job market remains very weak. But a closely watched measure of manufacturing in eastern Pennsylvania, Delaware and southern New Jersey accelerated last month, according to the Federal Reserve Bank of Philadelphia. And the Conference Board in New York said its index of leading economic indicators rose again in June, undergirding expectations for increased growth in the latter half of the year.
If these positive signs aren’t going to go for naught, financial markets have to stay stable. The fact is that the availability and cost of credit remains a critical component of just about every economic decision these days. Housing construction, home sales and mortgage refinancing all depend on ordinary Americans having the confidence to spend and the ability to borrow.
Some people may think that the federal government borrows too much, but since the financial crisis hit in late 2007, Americans on the whole have been too restrained in their borrowing. Too much debt may be a bad thing, but for better or worse credit is necessary.
If the debt crisis passes soon, then interest rates — which remain historically low under pressure from the Federal Reserve and global conditions — are unlikely to be much affected in the short run. Housing might benefit for many months from low mortgage rates, and consumers might flock to the stores, unworried that the cost of interest payments on their credit cards is likely to skyrocket.
If the crisis persists, and particularly if the Aug. 2 default deadline passes without a resolution, and investors decide that maybe Uncle Sam isn’t always going to be good for his debts, then the world will come crashing down.
Surprisingly, Congress doesn’t seem too focused on that point. These days, the talk is almost all about reduced government spending. Lawmakers don’t seem to connect the dots that the cost of credit for the United States government has a direct bearing on the cost of credit to American consumers and companies. Mortgage rates, student loans, car loans and credit card rates will all rise if the federal government has to pay more to borrow.
The signs of a fragile recovery are becoming clearer. But Congress has to know that all the good news, such as it is, can be washed away in a brief moment.