Congress Delivers Knife Wound to Housing Recovery

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Industry pundits and economists are storming media outlets to pontificate about the ramifications of the U.S. government shutdown, sharing their opinions on the fate of everything from food safety to the football schedule. For the U.S. real estate industry, there is not much mystery - the shutdown is a body blow, a swift kick in the rear, a jailhouse knife attack.

There's no positive spin to put on the sudden intrusion of Congress' sandbox squabble on a housing market that was eagerly approaching normalcy. No happy face to slap on the cover. No ironic twist.   

This is only bad news. The only question is, how bad will it be?

In the short term, it may be, "not that bad." Some basic functions of the federal loan industry will continue, although at a slower pace. There will be problems with the IRS and Social Security, but a few days delay won't be ruinous, if the shutdown is brief.

But that's a big "if." And the real ramifications for the real estate industry go far beyond the machinations of the federal bureaucracy.

More than anything, the government shutdown will strike at the one element the housing industry can ill-afford to lose - consumer confidence.

For all the hype about the U.S. housing recovery, it is still at a delicate level. Prices are rising rapidly in areas hardest hit by the economic collapse, but the increases are driven in large part by investors and funds looking for buy-to-rent opportunities. In Miami, 60 percent of sales are all-cash deals.

Analysts can point to all sorts of quirks in the market that are sure not to last - including exceptionally low interest rates and inventories at historically low levels.

A healthy, "normal," housing industry requires a steadily growing economy creating healthy demand, balanced by a measured amount of supply. At the same time, a steady stream of financing must be available, as well as a population of willing sellers.

However, more than anything, a healthy housing industry requires consistency. Any whiff of uncertainty can turn a surging market into a whimpering, hesitant market overnight.

More than most industries, confidence is essential for housing. Home builders build when they can reasonably predict future demand. Families move to a bigger house when they know the time is right. Investors lay down their money only after they feel convinced there are few obstacles to decent returns.

Even if Congress gathers around a big bonfire and sings Kumbuya in the next few days, the government shutdown has already injected a big dose of uncertainty into the market. With the debt ceiling discussion looming on the horizon, the sight of Congress acting like kindergartners only serves to remind potential home buyers of just how easily it can all fall apart.

For many people, a new home is a discretionary purchase, the biggest discretionary purchase of their lives. They only take that step to upgrade or move to a new neighborhood when they feel secure it is a sound fiscal move for their family. Lenders only lend when they are secure in the market and playing field.

Gaudy price increases aside, the market was getting to that point. Now Congress has thrown a huge wrench into the works, ensuring that uncertainty and suspicion will continue in the market for the upcoming selling season.

Once the federal budget is back in place, the market will undoubtedly return to its usual anxieties. But who knows when that will happen?

The government shutdown won't derail the market, but it will certainly delay it. And it is all made worse by the knowledge that it a wound inflicted by people who are entrusted to do good for the public.

A recent poll shows Congress' approval rating at 10 percent. That seems high.

Kevin Brass is Global Editor of the World Property Channel.