Batten Down the Hatches
The past several years have seen the financial industry basking in historically low interest rates. However, August ushered in a noticeable change to the tune borrowers have been singing, with several hinting at conceivable concerns about having just 60 to 90 days to close as many deals as possible. What is even more problematic is that it’s not just interest rates that are causing a general unease among borrowers. There is also an overarching concern that the current economic malaise will turn into something much worse.
To that end, the nonpartisan Congressional Budget Office recently issued a warning about the so-called “fiscal cliff” – a combination of tax hikes and spending reductions. The group predicted that the U.S. economy will go into a recession next year if the Bush-era tax cuts expire and automatic spending cuts take effect. In its latest report, the CBO predicts that the U.S. economy will grow by 2.1% in 2012, but fall by 0.5% between the fourth quarter of 2012 and the fourth quarter of 2013 under the fiscal cliff scenario. The CBO said unemployment would jump to around 9% in the second half of 2013 from its current 8.3% if the tax increases and spending cuts take effect.
The CBO has produced projections under an alternative fiscal scenario that incorporates the following assumptions: that all expiring tax provisions are extended indefinitely (except the payroll tax reduction in effect in calendar years 2011 and 2012); that the AMT is indexed for inflation after 2011; that Medicare’s payment rates for physicians’ services are held constant at their current level; and that the automatic spending reductions required by the Budget Control Act, which are set to take effect in January 2013, do not occur (although the law’s original caps on discretionary appropriations are assumed to remain in place).
According to this scenario, the CBO predicts that the economy would be stronger in 2013, with real GDP growing by 1.7% between the fourth quarter of 2012 and the fourth quarter of 2013. According to the Budget Office, the unemployment rate would be about 8% by the end of 2013.
The report should serve as a warning to members of Congress, who are expected to try to work out an arrangement to avoid the spending cuts and tax hikes. Democrats and Republicans are currently at an impasse as to whether to extend all the Bush tax cuts, or apply them only toward the first $250,000 of a household's income, as Democrats have proposed in a bill passed by the Senate.
The fate of the fiscal cliff is an issue that will have widespread ramifications for the overall health of the U.S. economy. Many borrowers are beginning to worry that there may be a pullback in the involvement of the capital markets, thereby narrowing the window for getting deals done. It is also certainly possible that interest rates could rise in the near future. The latest numbers from Freddie Mac reveal that 30-year fixed mortgage interest rates are up for the fourth straight week. According to the GSE’s Primary Mortgage Market Survey, the 30-year fixed-rate mortgage averaged 3.66% with an average 0.7 point for the week ending August 23, 2012, up from the prior week when it averaged 3.62%.
It remains to be seen exactly how these issues will play out, especially following November’s Presidential election, but for now, borrowers are battening down the hatches and bracing for a potential economic storm.
Mark Scott, Principal of Commercial Mortgage Capital, can be reached at firstname.lastname@example.org or 973-716-0006.