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Housing Recovery Could Blunt a Fiscal Cliff Standoff

NEW YORK ( TheStreet) -- As Republicans and Democrats brace for a budget standoff based on ideological differences on tax hikes and their impact on small business, lawmakers may find common ground by including housing market relief into discussions on how to grow Main Street America.

It's clear after Republican House majority leader John Boehner took to airwaves for a second time since President Barack Obama's re-election that a partisan budget divide may push the United States over a so-called 'fiscal cliff' of tax increases and government spending cuts scheduled for early 2013.

But in scoring the points made by Boehner about resisting tax increases that could harm small businesses versus a Democratic platform to end Bush-era tax cuts on top earners - including a recovering housing market to the debate could create room for negotiation.

Notably, Boehner's refusal to restore pre-Bush tax rates on those earning $250,000 and over hinges on the negative impact the hike would have on small businesses, which often declare earnings as personal income.

Small business hiring is one of the weak parts of recent monthly employment reports, notes the National Federation of Independent Business, and a bump up in high income tax rates could impact roughly one million small businesses, according to calculations from the Joint Committee on Taxation.

If small business is the focus of whether a budget deal - a so-called 'grand bargain' - can be reached, then it's time for lawmakers in both parties to widen the scope of their discussion on how to bolster that segment of the U.S. economy, which Bureau of Labor Statistics data suggests is a key missing ingredient to employment.

Tax rates, whether they remain at current levels for small business or if they increase to pre-Bush levels, aren't the only factor holding back growth and hiring in the sector.

Other key issues include still shaky consumer confidence, weakness in large European and emerging market export economies - and most crucially - fragile small business access to capital by way of bank credit or home equity borrowing.

The widespread consensus among economists, including Lawrence Yun of the National Association of Realtors, is that home equity - the positive difference between a home's value and an owner's mortgage liability - is a key source of capital for small businesses, in contrast to thawing equity and debt options that are available to mid-and-large-sized businesses.

Unfortunately, as a result of the housing bust the 20-City S&P Case-Schiller Home Price Index remains far below pre-crisis levels , and homeowner equity is roughly half what it was at the housing market peak in 2006.

Depressed home values remain a key constraint for small business creation and widespread negative home equity in many hard hit regions precludes real estate assets from being used a source of capital for hiring or expansion.

But that's not to say trends aren't improving, as the nation's overall home equity surplus shows an increasing rate of recovery. In second quarter results released by the Federal Reserve in late September, home equity rose to its highest post-crisis level, even eclipsing 2008 levels.
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