Every 10 seconds we are reminded of the impending “fiscal cliff” . We are hearing about it so much that many are just plain tired of it. I know that I am. Figure it all out already- will ya!
Of course many know that with any compromise by years end(or slightly thereafter) we will soar over the Fiscal cliff and the entire nation will have about $600 billion in extra taxes automatically imposed on its citizens,businesses etc.
With the markets gyrating on every word spoken by President Obama or House leader Boehner it is often comical to watch the movements as we all know:
THREE BASIC TRUTHS ABOUT THE FISCAL CLIFF
-THE FISCAL CLIFF WILL BE RESOLVED AT THE LAST MINUTE– much like the budget talks last summer, government always resolves this things and usually at the last minute
-THE RESOLUTION WILL BE MORE “CAN KICKING”- this is the way of the world right now; quick fixes and extend and pretend. For quick reference take a look at Japan and now Europe and QE infinity
-THE FINANCIAL MARKETS WILL GO FULL SCALE UP ON NEWS OF A RESOLUTION- With the current Bernanke put in place with QE infinity- where else are investors going to get a decent return?
This is where it gets interesting. The three major real estate items hanging on the Fiscal cliff are:
-THE MORTGAGE INTEREST DEDUCTION
-THE PROPERTY TAX DEDUCTION
-THE 250K/500K CAPITAL GAINS DEDUCTION FOR SINGLE/MARRIED ON PROFITS
Hey wait a second- these are three major deductions that the national housing market has relied on for many years now. If any of these are taken away or modified- it could seriously have a impact on homeowner’s decision on whether to buy a home or not.
From the Washington Post:
When it comes to deductions for taxpayers who itemize, there are hardly any
that are bigger than the mortgage interest write-off (more than $90 billion a
year in revenue costs to the Treasury) and local property taxes (roughly $20
billion a year). They are perennially high on the list compiled by reformers
seeking to streamline the sprawling federal tax code.
For much of his first term, President Obama advocated putting a cap on
deductions by upper-income taxpayers — singles with more than $200,000 in
adjusted gross incomes and joint-filing married couples with income in excess of
$250,000. Under Obama’s plan, these taxpayers could not take deductions beyond
the 28 percent marginal bracket level, even though they might be in the 33
percent or 35 percent brackets. Mortgage interest, real property taxes,
charitable and other write-offs would be affected by such a cap.
But would limiting real estate deductions necessarily lead to lower home
prices? A 1995 study by the consulting firm Data Resources Inc. estimated that a
consumption-based “flat tax” that repealed all deductions would lead to a 15
percent aggregate decline in home values, costing owners $1.7 trillion in equity
If we already know that we will not go over the cliff ,then what impact will it have on local housing?
Our local market is currently a market never seen before in history. We have a artificially restricted inventory supply (no foreclosures,AB-284) and our predominent buyer is a hedge fund or investor looking to rent out the propeties. This has caused low inventory= higher prices=rental glut= difficulty of owner occupants to get a decent priced home.
In our opinion-with the inevitable fiscal cliff compromise- there will be some modification of the Interest deductions and maybe the capital gains deduction. With our current state of housing being a investor driven artificial game- I forsee little to no impact in our market. However for many “normal supply” higher end markets- the fiscal cliff compromise will have a negative impact.
What do you think?