The “fiscal cliff” has taken center stage after the election. The fiscal cliff is Fed Chairman Bernanke's shorthand for the combination of federal tax increases and spending cuts that are scheduled to go into effect January 1, 2013. If we were to hit the cliff full throttle, we'd experience $500 billion in expiring tax cuts and automatic government-spending reductions.

The fiscal cliff's attention is well deserved. The Congressional Budget Office (CBO) estimates the economy will be pulled down into another recession, with gross domestic product (GDP) shrinking 0.5%, if Congress fails to act. In turn, unemployment will rise to over 9% from today's 7.9%.

In other words, there is an elevated level of uncertainty still weighing on housing; however, we expect this uncertainty to be removed before the end of the year. We will likely see a compromise on income-tax rate increases; and we will likely see a compromise on federal spending cuts.

Once the uncertainty of the fiscal cliff has been removed, we expect business investment and hiring to increase, which will lead to more normalized economic growth rates (between 3% and 4% annually). Should that occur, the odds increase that we will be looking at fewer value-priced homes and higher mortgage lending rates this time next year.

Courtesy of Jessica Regan.

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