The U.S. housing market has shown increased stability in home sales during 2011 compared to the previous year. Home prices are up 18% since their low in February. Signs of recovery remain mixed in the economy—employment and GDP came in less than expected while the strong points were in consumer confidence and new home starts.
The debt ceiling has been raised without any drastic changes to occur immediately. Although this prevents a sudden shock to a weakening recovery, over the next year and a half, experts anticipate considerable changes in how the government spends and collects money. The uncertainty of what is to come and how it will impact various industries will likely cause some to play on the safe side. The good news is that the government remains solvent and will be able to pay its bills without major disruptions.
Economic improvement typically spurs rising interest rates in order to rein in inflation. Although inflation has been a source of recent concern, the Fed appears confident it will remain in check for the near term. Meanwhile, buyers continue to benefit from historically favorable buying conditions, and sellers are encouraged by increased market stability.
Debt-Ceiling Deal:
After a drawn-out debate between the House and the Senate, Democrats and Republicans; Congress and the President reached a deal on August 2, 2011, to raise the debt ceiling. Because of the decision and the additional borrowed funds, the United States is safe from defaulting on its debt and will be able to pay its bills. The deal includes the following:
Immediately cuts spending by $917 billion and raises the debt ceiling by $400 billion. It will raise the ceiling by another $500 billion in February, providing funds through early 2013.
Creates a joint committee of twelve members from the House and Senate that will make recommendations for $1.5 trillion in deficit reduction measures, and if the plan is rejected by Congress, several automatic spending cuts will take effect.
Requires Congress to vote on adding a balanced budget amendment to the constitution, which would mandate that future spending cannot exceed revenues. If it passes, the debt ceiling can be raised by $1.5 trillion. If not, then it can only be raised by $1.2 trillion.
Lack of concrete details about how the deficit will be reduced sets the stage for continued political debate in the coming months and years. And with the U.S. securities AAA rating being threatened with a downgrade, the credit agencies will watch carefully to ensure Congress takes action to steer the country in a financially solvent direction. A downgrade would result in higher interest rates, making it more expensive for consumers and the government to borrow money.
Bottom line: Crisis averted—it’s business as usual for now, but this is not the last to be heard regarding U.S. deficit and debt levels. Some reports indicate that this may change the game in Congress from “spend, spend, spend” to “cut, cut, cut.”
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