Kiplinger Connection
Housing • Taxes • World Business

Housing: Seeds of rebirth
Taxes: Big refunds in the works
World business: China’s rising inflation bumps prices in U.S.

Housing
Amid the housing doom and gloom ... rising foreclosures, plunging housing starts, scores of unsold homes, and falling prices ...
It’s hard to even imagine a recovery.
But still obscured in the ashes ...
Seeds of rebirth are germinating.

Plummeting housing starts will help to trim the number of homes for sale. As those homes are purchased, with the help of more realistic selling prices ... finally ... the inventory of unsold homes in many areas will shrink, allowing building to perk up.

Expect starts to hit bottom by Jan.
But the upturn will be long and slow.
Housing starts will total just under 1 million this year and just over 1 million next year. Strict lending rules requiring a down payment of at least 5%, as well as more foreclosures this year, will be big drags on the recovery.
Full health is about three years away. In 2011, we expect starts as well as sales of new and existing homes to near the numbers of the late 1990s.

Look for home prices to continue to fall in many areas into 2009.
Hurting the most: Detroit, Cleveland, and other Midwest cities heavily dependent on the beleaguered auto industry for employment. Also, New York City and nearby suburbs in New Jersey and Connecticut, plagued by a large wave of layoffs in financial services industries.
The rate of decline is slowing in once superhot cities, such as Las Vegas and San Diego, where prices have fallen about 20% over the past year or so. Ditto for Miami, Phoenix, and Los Angeles.
Among cities with climbing prices: Houston and Austin, Tex.; Salt Lake City; Huntsville, Ala.; Knoxville, Tenn.; Raleigh, N.C.; and Oklahoma City. They can expect more single-digit increases.

Home builders aren’t finished with additional markdowns ... up to $100,000 on homes once priced at $300,000, for example. And they’re sealing deals by adding flat panel TVs and other amenities.
But more and more buyers won’t wait much longer to try and catch the absolute bottom price. With mortgage rates at low levels ... under 6% for a 30-year fixed ... qualified buyers are pulling the trigger.
Also helping the housing recovery: A new law coming soon that will give local governments $4 billion to buy foreclosed properties plus provide more mortgage revenue bonds to refinance subprime loans.

Taxes
Home builders aren’t the only firms in line for big tax refunds.
All corporations will be eligible to defray losses in 2008 and 2009 by carrying them back four years to offset prior profits, if the Senate version of the pending housing reform bill prevails. We believe the plan has a decent chance of passage in a month or two. It would give immediate refund checks to automakers and their suppliers, manufacturers, financial services firms, and other businesses. The current two-year carryback doesn’t help firms with 2006-2007 losses.

While a break at the gas pump would be nice for everybody ...
It won’t come as a summer gas tax holiday, as proposed by Sen. John McCain. Congress isn’t about to subtract the federal tax of 18.4¢ per gallon. Even if Congress and President Bush signed off on such a move tomorrow, making the tax adjustment could take months. Moreover, a gas tax holiday would further decrease federal funds earmarked for badly needed highway work, costing thousands of jobs.

World business
China is letting its currency escalate faster against the dollar to contain inflation from commodity imports. A strengthened yuan will help stabilize the trade deficit between the U.S. and China. The gap will total just under last year’s record $256 billion in 2008 and may shrink further in 2009 because of exchange rate adjustments.
The move makes U.S. exports more competitive with Chinese goods in their home market. Moreover, because the yuan is not similarly rising against the euro or the yen, American exporters also gain an edge against exports from the European Union and Japan. Benefiting the most: U.S. machinery, chemicals, medical and scientific gear, semiconductors, information technology equipment, and components—plus meat and grains.

However, a stronger yuan carries a price: Higher U.S. inflation. Allowing the yuan to appreciate against the dollar isn’t cutting inflation in China so much as it is exporting it. Add to that the price increases Chinese manufacturers are slapping on their goods to cover rising wages and costlier materials. The result: a significant upward bump in the price U.S. consumers pay for Chinese imports at big retail chains. U.S. manufacturers looking to hold down costs by sourcing elsewhere won’t find much immediate relief. Inflation is a problem all over Asia.

Reforms in Mexico will let foreign firms invest in joint ventures with Pemex, Mexico’s state operated oil monopoly, helping to build and run refineries, oil wells, pipelines, and other oil infrastructure.
But the changes won’t allow revenue sharing deals in exchange for investing in Mexico’s oil sector. Still, there’ll be no shortage of U.S. and other foreign companies bidding for business in Mexico. Mexico’s output is declining to the point that, without some changes, the country will cease to be a net oil exporter in 8-10 years. Mexico is now the third-largest foreign supplier of oil to the U.S.