Why should you be concerned about the sequester? What is the sequester? It’s the talk of the town in Washington, D.C. and it should be on your mind too. The sequester has far-reaching effects, even impacting the housing market in Minnesota.
The sequester, which began March 1, is a set of automatic spending cuts put into law by the Budget Control Act. Signed by President Barack Obama in August 2011, that legislation raised the debt ceiling and sought to apply pressure on Congress to come up with a longer term plan for deficit reduction.
The $1.2 trillion in budget cuts will be spread over nine years and are equally divided between domestic and defense-related spending. During the remainder of the 2013 fiscal year, $85 billion worth of cuts are set to go into effect. Government spending across the board will be affected, including the Federal Housing Administration (FHA) and the Department of Housing and Urban Development (HUD).
The sequestration will cut $42.7 billion from non-defense federal agency budgets this year, according to government estimates. For real estate, the impact will be magnified because Federal Housing Administration’s market share has grown to five times its 2006 level as it expanded its role during the property bust. The FHA has backed more than 25 percent of U.S. mortgages since 2008, according to HUD data.
Housing Secretary Shaun Donovan said sequestration jeopardizes the Federal Housing Administration’s ability to process loans, which will not only seriously affect buyers who wanted to apply for an FHA loan, but slow the overall economic recovery. It will be more difficult and it will take longer to get a mortgage as the FHA loses significant funding and staff. The implications from the sequester are expected to contract the housing market recovery by about two percent.
According to a recent news article in Bloomberg, HUD is prepared to lay off FHA loan origination and foreclosure counseling staff as a way to deal with the sequester. Although the FHA is already financially constrained due to the massive amount of risk it carries in its mortgage portfolio and its inadequate reserves, it stands ready to issue more guarantees. The problem is that the pace of its approvals could slow down considerably with less staff. Many first-time home buyers rely on the FHA. As the speed of the mortgage process slows, it will trickle-down to hurt sellers. The cuts will directly correlate to the amount of money readily available for purchasing homes. Buyers may adopt a more conservative approach, slowing the success of the seller’s market recently established in Minnesota.
The Minnesota housing market started strong statewide this year. The Minnesota Housing Report found homeowners were able to sell their homes on average in about 97 days.
These positive numbers will likely be slowed as buyers have less power to make competitive offers and the mortgage process takes longer. Minnesota started the year off positively as homeowners were receiving 91.8 percent of their original list price, which was also a +2.8 percent increase from January 2012 to January 2013. While it is expected these numbers will change with the implementation of the sequester, Minnesota has a strong chance to succeed as the state ranks second in the nation for housing recovery.