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Moody's economist: Tax cut was a dud


Moody’s Analytics Chief Economist Mark Zandi was highly critical last year of the Republican tax overhaul. Zandi discussed the impact of those changes a year into the reforms, and the outlook for the housing industry, the economy and housing finance reform.

Roughly a year ago, you said that the Republican tax overhaul wouldn’t take the economy anywhere. Do you still believe that?

As expected, the tax cut provided a temporary boost to growth. So growth peaked last year in the second quarter going into the third quarter, and has faded since. Right now, growth rates are consistent with the growth rates we were getting before the tax law. Moreover, one of the administration’s selling points with the tax cut was that it would sustainably lift investment in a significant way, and there is no evidence of that. Investment spending got a near-term boost in the first-half of last year, but since last summer has gone flat. So yeah, I don’t think the tax cut took us anywhere, did not lift growth in any significant way. But, of course, it left us with a much bigger budget deficit and debt load. 

markzandiHow do you think the economy is doing?

I think growth is around 2 percent to 2.5 percent, roughly what it has been on average since the beginning of economic expansion. This time last year when we got the stimulus, the temporary boost to growth, we were closer to 4 [percent GDP growth]. Job growth is strong, but it is still very consistent with that kind of growth rate of 2 percent to 2.5 percent.

Is there anything about the economy that worries you given the wild swings in the stock market?

Well, the dysfunction, the geo-political risks, prospects for further government shutdowns. We have the Treasury debt limit [the debate over raising the debt ceiling] coming this spring or early summer; the trade war with China; Brexit. I think those are the most serious threats to the expansion in the near term. And, of course, that manifests itself in the stock market. Stock prices are down from their peak, in part, because of all these geo-political threats.

Did the government shutdown have any effect on the economy?

I think it dinged growth. It clearly didn’t hurt the job market. We will have to wait and see on business investment. Clearly, sentiment has fallen sharply. Business sentiment is off a lot, and got nailed because of the shutdown and other factors: the trade war, the lower stock market. That lower confidence manifests itself not in lower jobs. Because the job market is so tight, businesses are scared that if they don’t hire, they are going to be left without people. They are more likely to pull back on their investment spending, on their travel and investment. That data is more lagging, and it has been disrupted by the shutdown itself.

We will have to wait a little bit — several weeks, a couple of months — before we get all the data in. My guess is that the casualty of the shutdown has been business investment.

What is your outlook for the housing market?

I think 2019 will be flat. This recent decline in mortgage rates will help. We were at 5 percent for the 30-year-fixed not too long ago. We are now down to 4.5 percent, and it is falling. That should provide support to housing, but weighing on housing demand is the tax-law change, which took away many of the tax preferences for homeownership. The impact of that is still filtering through the housing market, particularly in the Northeast and California, and Florida, where those tax preferences are important for taxpayers. 

And then, affordability is an issue. Even with the lower mortgage rates, the runup in house prices over the last six years makes housing very hard to afford for many entry-level buyers. So, I think, that is still an issue. If you told me that home sales in 2019 came in close to what they were in 2018, I would say that sounds about right to me.

We might see a little bit more construction, particularly at lower price points. We might see more homes built this year than in 2018. In terms of house price growth, I do expect this year to be weaker than it has been in recent years, probably in the very-low single digits because of affordability issues and the tax-law change.

What are the prospects for housing finance reform this year?

I think there will be some administrative changes initiated by FHFA [Federal Housing Finance Agency] and Treasury around the kind of lending that Fannie and Freddie do. Cash-out refi might be curtailed. There might be some pullback on the caps on multifamily lending and loans to investors. There is an outside chance they might look at loan limits and guarantee fees. That is the most likely changes that will occur in 2019.

There is going to be a legislative effort. We saw that today. The Senate Banking Committee released its vision broadly of what GSE reform will look like.  It is pretty similar to where [U.S. Sens. Bob Corker and Mark Warner] wound up in the last Congress. There is some differences, but it is pretty similar. I think that is still a pretty heavy lift to get done. You still have the same problem that you have many stakeholders that are really comfortable with the status quo, and don’t want to make any changes unless they are absolutely sure that what they get out of it is not only as good as the status quo, but better. That is a pretty physical circle to square.

So, in other words, you still believe it will likely take a recession and deep GSE losses to get Congress moving?

And even then it would have to take a pretty significant recession that would hurt the housing market, and for Fannie and Freddie to start losing money.


 

Questions? Contact at (425) 984-6017 or victorw@scotsmanguide.com.

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