What is all this Fiscal Cliff talk?
For the past several weeks, you can’t watch the news, listen to the radio, or open up your Google news feed without hearing about the fiscal cliff. First of all, what the heck is it? Second of all, what might it mean for real estate?
The so-called fiscal cliff is the combination of large spending cuts and tax increases that are scheduled to be automatically enacted at the beginning of 2013. President George W. Bush’s income tax cuts will expire for many Americans, and billions of dollars of spending cuts will take effect because Congress could not reach a deal to reduce the deficit by at least 1.2 trillion over 10 years. The current debate stems from the fact that Democrats want a combination of spending cuts and tax increases for households that make over $250,000 and Republicans want to cut spending, but will not negotiate any tax increases. “Going over the cliff” is seen as bad for everyone because it forces rapid, deep cuts in many essential areas including military spending.
What might this mean for real estate?
Economists are predicting that if an agreement is not reached before the end of the year between Republicans and Democrats, the economy may contract up to 1.5% in the first six months of 2013. This would mean that joblessness would rise to above 9% again and they project $500 billion will be taken out of the economy. Almost certainly, many fragile local economies would be impacted by this downturn, perhaps relapsing into another recession. Higher taxes would mean struggling families may have trouble making their mortgage and foreclosures would be back on the rise. It would also mean that investors and potential buyers alike would have less capital to invest in the market, and housing prices could plummet.
Additionally, the mortgage interest deduction, which reduces homeowners’ taxable income by allowing them to subtract their mortgage interest payments from their personal income is on the chopping block. For many, this is a big incentive for homeownership and saves American millions every year. Another related tax break set to expire is the Mortgage Forgiveness Debt Relief Act, which relieves homeowners from being taxed on any mortgage debt that was forgiven through a short sale, foreclosure, or loan modification.
We will be keeping our eyes on Congress in the next several weeks to see if a compromise can be reached. Cliffs or no cliffs, we here at Team Troy have your back through all the market ups and downs today and in the future. Wishing you a safe and happy upcoming weekend!