As we start a new year with the impending fiscal cliff discussions, regardless of what is negotiated in the final hours of a divided Congress, specific outcomes are expected. The housing market will be impacted by the adjustments to the tax structure that will impact everything from the price of milk and gasoline to investments and personal income. As Bush-era tax cuts expire and Federal budget reductions are automatically put into place, the public debt will be reduced by $7 trillion over the next decade. This will largely come from increased taxes on every tax bracket as listed below:
Annual income: $20,000 to $30,000.
Average tax increase: $1,064.
Annual income: $30,000 to $40,000.
Average tax increase: $1,417.
Annual income: $40,000 to $50,000.
Average tax increase: $1,729.
Annual income: $50,000 to $75,000.
Average tax increase: $2,399.
Annual income: $75,000 to $100,000.
Average tax increase: $3,688.
Annual income: $100,000 to $200,000.
Average tax increase: $6,662.
Annual income: $200,000 to $500,000.
Average tax increase: $14,643.
Annual income: $500,000 to $1 million.
Average tax increase: $38,969.
What is at stake is the mortgage interest deduction, and with an increase in taxes, even just $1,000-$2,000 per year will impact whether or not a borrower rents or buys. But, allowing tax cuts to expire and slashing spending in the name of fiscal prudence is where Republicans and Democrats are both wrong, and share a significant part of the blame. The recovering housing market will take a hit, and the policies will take the air out of the sails of builders who build the homes and banks who finance the loans. "The best-case scenario is a deal that avoids sharp tax increases and spending cuts next year," said Jed Kolko, chief economist at real estate website Trulia. "With that kind of deal, you would avoid stalling or reversing the economic recovery while at the same time creating a long-term path for getting the government budget more in balance."
With the U.S. national debt over $1.6 trillion, many economists are suggesting stronger action on the deficit so as to embrace the challenges now rather than later. The latter 12-16 months of Obama’s presidency will be largely ineffective – otherwise known as the ‘lame duck’ part of the second, four-year term. Therefore, the time to act may arguably be now, but the real question is, which sectors of the markets should suffer? With the housing market nearly 15% of the U.S. GDP, should this be the sacrificial lamb at Obama’s altar?
This isn’t a largely Democratic issue either. In the week of Christmas, former Federal Reserve Chairman Alan Greenspan said in an interview with Bloomberg Television that letting taxes rise would be a small price to pay to get Congress to okay spending cuts on entitlement programs, even if that produces a "moderate recession." This is the foundation for the December issue of our housing publication. This is the time for you to prepare for a 2015 housing recovery for your business and real estate practice, as it may be necessary to take two steps backwards (economically) in order to take the initial and sustainable steps forward.
What Happens Next?
Most economists concede that something needs to be done to reduce the Federal deficit and balance the budget, at least over the long term. There is broad disagreement as to what should be done. If you think this is confusing for consumers, economists and their recommendations vary significantly.
"Our main concern is that the tax reform effort be done in a more measured, careful way," said David Crowe, the National Association of Home Builders' chief economist. Crowe’s approach to the market is more cautious; he would like to see tax cuts extended until the economy is in a better position to withstand rising taxes. Predictably, such things like the housing tax credits, deductions and other incentives should be left in place. The fear is balancing the budget on the backs of various economic sectors which, in the end, will undermine economic growth.
With an ailing economy, President Obama has demonstrated no sign of restraint in spending as we work our way out of the economic doldrums, which will in the end increase deficits, not reduce them. This is the catch-22 both in reality and in economic philosophy. It is the epitome of rationalizing one’s intent littered with unintended consequences. Unfortunately and fortunately, to close out 2012, the housing sector had begun to exhibit signs of a modest and stabilizing recovery. This is reflected in the improving financial condition of various home-builder stocks – as listed below:
IBD's Building-Residential/Commercial industry group ranks No. 4 of 197 groups tracked, with its largest names — Lennar (LEN), Pulte Group (PHM), D.R. Horton (DHI), Toll Bros. (TOL) and NVR (NVR) — all up at least 3% through December 29th.
NAR & U.S. Housing Home Sales Are Up
The National Association of Realtors reported that existing-home sales in the U.S. climbed 2.1% in October to an annual rate of 4.79 million units. This was above the forecasts of many economists, while the inventory of existing homes continues to decline to 2.14 million, the lowest level since 2002. Housing starts in October rose to just below 4% for an annual rate of 890,000, a 40%+ improvement year over year. This is exciting news for those of us in Real Estate and Housing. This, in fact, is exciting news for consumers as well. This could come to an end with more uncertainty in the minds of home buyers and sellers if Congress doesn’t implement a confident economic plan moving forward. Our economy can handle tax increases provided there is a clearly articulated plan, where consumers can be confident our economy is headed in the right direction. The challenge is, there is no singular and trusted voice in Washington – and this includes the President.
"The current housing market recovery is being fueled by fundamentals like incredibly high housing affordability. As such, it can weather the weak recovery in the broader economy we're currently seeing," said Stan Humphries, chief economist at real estate website Zillow.
Where the uncertainty comes in is the market is not immune to political and economic shocks coming from the negotiations around the Fiscal Cliff. Extending the Bush era tax cuts could buffer this, which is unlikely given the administration’s confidence in its mandate from the 2012 Presidential elections. The reasoning behind this is to inspire Americans at all tax brackets to invest and spend money, which will keep the economy and capital flowing. But this trickle-down concept has been rejected by Obama and economists loyal to the Democratic creed.
As the final details are negotiated and released, their impact on the housing market and all sectors that support and influence the real estate business in various markets around the U.S. will be reported and analyzed. The goal of this publication is to identify opportunities where you can grow your business and best serve consumers regardless of market (and tax) conditions. Homes will be sold; consumers will continue to move. Even if the market shrinks by 30%, someone will be funding that loan; some Realtor® will be representing the buyer or seller. It may as well be you. The difference will be what you know about the market and how quickly and effectively you can react to it.
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Any questions or feedback on this article, email Rick Roque, Managing Editor of The NicheReport Real Estate Edition at email@example.com or call him at 408.914.5895.