If enacted as proposed, the President’s plan would strengthen economic growth and the job market and the stock market in 2003-2004, while also increasing the federal budget deficit and putting some upward pressure on interest rates. While the long-term effects are open to question, there’s no doubt that timely passage would deliver substantial economic positives prior to the 2004 elections.
The President’s plan contains nothing specific to housing, and NAHB immediately noted the omission of a new homeownership tax credit that seemed to have some chance for inclusion. The short- and long-term impacts of the plan on the housing sector certainly could be a mixed bag. There is the likelihood of short-term positives from a stronger economy. There is also the possibility of long-term negatives from higher interest rates, devaluation of the mortgage interest and property tax deductions (via lower marginal tax rates), and reductions in the relative advantages of investment in owner-occupied housing over business fixed investment (via elimination of double taxation of corporate income). The new tax treatment of corporate income also could reduce corporate demand for low-income housing tax credits as well as market demands for tax-exempt bonds, possibly weakening the two principal policy supports to the affordable rental market.
It is much too early to tell exactly what will be enacted into law, or when a bill will be passed. But the Administration is in the driver’s seat, and it seems likely that a package resembling the President’s plan will make its way through the political and public-relations processes by Memorial Day. We’ll adjust NAHB’s forecasts as the details and timing firm up. For now, the positive prospects greatly reduce the chances for a double-dip recession in 2003, barring disasters on the geopolitical/terrorism fronts.