FHA hits brakes on housing recovery with budget cuts

Fed Buying

The housing recovery, engineered by the Federal Reserve’s program of buying mortgage bonds to lower borrowing costs, has been successful enough that the central bank should reduce the pace of the acquisitions, Federal Reserve Bank of Dallas President Richard Fisher said yesterday. This week, the average rate for a 30-year fixed mortgages is 3.51%, down from 4.95% two years ago, according to Freddie Mac.

Still, the budget cuts will trim half a percentage point from economic growth in 2013 and cause 1 million job losses, according to the Bipartisan Policy Center in Washington.

“Across-the-board, draconian cuts will hurt the housing recovery,” said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. “Housing will still have momentum, but a lot less momentum.”

The reductions will boost the unemployment rate, which was 7.9% in January, a quarter of a percentage point and keep it elevated for several years, Macroeconomic Advisers LLC said in a Feb. 19 report.

‘Additional Burden’

“Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant,” Fed Chairman Ben S. Bernanke said in congressional testimony this week. The cuts will have “effects on jobs and incomes,” he said.

While deep budget cuts could bruise the real estate market, reducing federal debt will support housing demand in the long term by putting the economy on firmer ground, said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York.

“There’s no way to get around the painful and negative effects of the cutbacks we need to put our fiscal house in order,” Shapiro said. “When the adjustments are happening, it’s not going to feel good.”

The cuts stem from a 2011 agreement to raise the debt ceiling and were intended to force Congress to reach a compromise on reducing spending. About half the reductions come from defense and half from domestic spending. The Obama administration doesn’t expect to see a deal reached by tomorrow’s deadline, Dan Pfeiffer, a senior White House adviser, said on a conference call with reporters on Sunday.

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