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The Economy is Shrinking – But It Won't Affect Housing


The Economy is Shrinking

The Economy is Shrinking – But It Won't Affect Housing - The U.S. Commerce Department announced last week that the economy shrank slightly in the fourth quarter of 2012, marking the first quarterly drop of the Gross Domestic Product (GDP) in 3 ½ years. The GDP is the market value of all officially-recognized goods and services produced within a country during a certain period of time. In other words, it's the total worth of the U.S. economy.

Economists at the Commerce Department blamed fiscal cliff concerns for the drop-off from October to December. They say the uncertainty of the situation caused companies to restock goods at a slower pace than usual, and they also point to government cuts in defense spending as a another reason for the shrinkage.

But what does all this mean for the housing market? Well, analysts say homebuyers and sellers shouldn't be too worried by the recent news! But in order to understand why a shrinking economy won’t affect the nation’s housing market, you have to break down the numbers…

Congress resolved the fiscal cliff issues by reaching a deal on January 1st that included automatic spending cuts across the board throughout government agencies. Many of those cuts go into effect on March 1st, but economists say they shouldn't trigger another recession. That's one tidbit of good news for anyone currently involved in the housing market. After all, when the economy collapsed in 2008, home prices plummeted and so did consumer confidence.

But if anything, consumers are spending more money these days, so it seems they are more confident in the security of their jobs and the direction in which the economy is headed. In fact, the Commerce Department announced that although the overall GDP dropped off in the fourth quarter of 2012, consumer spending increased 2.2 %. Business spending was also up from October to December, and among the industries reporting some of the highest profit increases were homebuilders.  

Speaking of profit increases, more Americans saw their income levels rise in the fourth quarter of 2012 as well. Many business owners paid out special dividends and bonuses to their employees before the year ended to avoid expected tax increases in 2013.

While those with jobs received more money, the number of individuals looking for jobs stayed roughly the same. Across the nation, the economy has added roughly 150,000 jobs per month for the last two years, but that's barely enough to reduce the unemployment rate, which has held steady at 7.8% for two months. Still, economists say a steady unemployment rate is better than an increasing one.

So, what does all of this mean?

Despite news of a shrinking economy, the worst news for most Americans is that Social Security tax increases have kicked in. As a result, the average working American's take-home pay will be about 2% less in 2013. That means consumers will have less money to spend on everything – including in the housing market.

However, consumer spending is up for now, and there’s no sign that the spending is going to slow down anytime soon. When you add to that the pledge from the Federal Reserve that they will continue to keep interest rates on home loans low, you have a housing market with a bright future.

So, while the U.S. economy may be shrinking slightly, the housing market is not!

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