Next Analysis Roundup will be posted July 1st
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House/Senate Still Working Out Tax Reform
The North Carolina Senate did not vote last week on adoption of a Finance Committee substitute According to reports from media and NCLM, leaders in both the House and Senate are trying to work on a compromise plan.
The substitute plan, which was referred back to the Senate Finance Committee last Wednesday, significantly reduces local revenues starting in fiscal year 2015 by eliminating local eligibility for sales tax refunds (starting July 1, 2014) and eliminating the local share of sales tax charged on food (starting November 1, 2014).
Counties will have the option to institute (by referendum or vote of governing body) a local option sales tax on food to supplement this loss, effective January 1, 2015. If not implemented at the County level, impacted local governments will have to offset significant reductions in local option sales tax revenues.
The leadership of the NC House does not support tax reform that has a negative impact on local government revenues. Governor McCrory also appears to be supportive of efforts to keep tax reform “revenue neutral.”
House/Senate to Conference on Budget
The NC House and Senate have selected those members who will serve on a Conference Committee to iron out difference in their budget proposals. If necessary, the General Assembly is prepared to pass a Continuing Resolution in order to continue State operations on July 1st.
The Senate version of the budget does reduce support for several programs utilized by local governments by a greater margin than the version passed in the House. The Senate also eliminated the 40% set-aside of lottery funds to Counties, a measure kept in the House bill.
Housing Market Overview
Wells Fargo Economists Mark Vitner and Anika Khan presented an overview last week of current and anticipated housing market conditions.
Here are their key observations:
- New household formation (key driver of housing growth and replenishment) remains significantly-below historic averages (980,000 in 2012, compared to historic average of 1,200,000)
- Household wealth growth is limited to financial assets, while growing in value of housing and other intangible assets is stagnant
- Low mortgage rates continue to benefit refinancing more than home sales
- New mortgage applications remain in post-recessionary range near 200,000 applications/week, significantly down from the pre-recessionary range of 400,000/week to 500,000/week
- Home prices have increased 8-10% in recent months, driven in large part by reduction in foreclosure sales and significant sales to investors (23% of sales in Charlotte are to investors)
- Homeownership rate has fallen to 65% (pre-recessionary level was 69%)
- Apartment vacancy rates continue to decline, though this should stabilize with accelerate growth in multifamily housing starts
- Nationally, 20% of mortgages remain in negative equity (underwater); however, many more still have insufficient equity to fuel market activity
- Forecasts for 2013: Construction up 28%, new housing sales volume up 28%, existing sales volume up 8%, home prices up 6-8%, 30-year fixed mortgage rate @ 3.93%
- Forecasts for 2014: Construction up 20%, new housing sales volume up 18%, existing sales volume up 7%, homes prices up 2%, 30-year fixed mortgage rate @ 4.3%
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Lastly, about that Latest Fed Announcement
Fed Chairman Ben Bernanke did indicate that the Federal Reserve’s currently policy of continued asset purchases will likely end in 2014. This was a contributing factors to significant market sell offs last week (and continuing into this week).
For a professional opinion of what this means, here’s what Wells Fargo said:
As widely expected, the Fed decided this week to keep the fed funds rate essentially at zero percent and to keep purchasing $85 billion worth of securities every month. In addition, the statement that the FOMC released after its meeting this week closely resembled the May 1 statement. However, there was one notable difference between the statements. In May, the FOMC said that it “continues to see downside risks to the economic outlook.” This week, the FOMC said that the downside risks have “diminished.”
In our view, this change in language is significant. Although few analysts expected the sequester would throw the economy back into recession, it represented a
downside risk to the economic outlook. Everything else equal, the Fed would want to continue to support the economy via more quantitative easing (QE) as long as the probability of sharply weaker economic growth was not insignificant. However, the economy evidently continues to expand, despite the restraining effects of the sequester, and the probability of a near term downturn has receded.
Neither the FOMC statement nor Chairman Bernanke in his subsequent press conference did anything to disabuse investors from the notion that has gained traction over the past month that the Fed would, sooner or later, begin to “taper” its purchases of Treasury and mortgage-backed securities. However, Fed officials did not indicate that “tapering” would begin in the near future. The Fed will continue to monitor incoming economic data to ascertain whether the economy still needs the crutch of continued QE. We forecast that after growing 1.5 percent in the current quarter, real GDP will grow 2 percent or so in the second half of the year, which will lead to only a slow decline in the unemployment rate. Therefore, we believe that “tapering” won’t begin until the fourth quarter. Although bond yields could subside somewhat in the near term—the yield on the 10-year Treasury security shot up nearly 30 bps this week, a trend increase in long-term rates seems likely in the coming months.