Home prices could fall over the fiscal cliff
The election is over, but the president doesn’t have much time to celebrate with the country’s economy still faltering. Smack dab in the middle of our fiscal problems is the challenge of a still weak housing market, which can go either way, taking the country’s financial recovery right along with it.
The fiscal cliff we’re facing on Jan. 2 could spell the end of what little housing recovery we’ve been enjoying for the past six months. According to Standard & Poor’s, the automatic tax increases and spending cuts that will take effect could result in a 20 to 25 percent chance the economy will go into a double dip recession.
If the government fails to find a compromise and avoid the fiscal cliff, economists are predicting home prices could tumble to a record low of 40 percent, below their peak in mid-2006, 9 points below the current 31 percent. Given that Congress remains divided after the election, it remains a question whether lawmakers can come to an agreement.
Along with other ways to increase revenue, the mortgage interest deduction remains in the crosshairs of legislators. The mortgage interest deduction costs the government about $90 billion a year and is targeted to be part of a broader plan to streamline the tax code by eliminating loopholes and deductions.
Two years ago the bipartisan deficit reduction commission known as Simpson-Bowles proposed changes to the mortgage interest deduction. At that time it recommended turning the deduction into a 12 percent, nonrefundable tax credit to all taxpayers, capping eligibility to mortgages worth up to $500,000, it is currently $1 million, and eliminating the deduction on interest from second homes and home equity debt.
Naturally, the National Association of Realtors was highly critical of this recommendation, claiming any changes to the mortgage interest deduction could depreciate home prices by up to 15 percent. What effect a change in the mortgage interest deduction as recommended by the commission would do on Anna Maria Island, where the real estate market depends on second home owners, is daunting to think about.
Another regulation that is set to expire at the end of the year is the Mortgage Debt Relief Act of 2007. The law exempts up to $2 million in mortgage debt forgiven by a lender in a short sale, loan modification or foreclosure from federal tax. If this regulation expires, homeowners would have less of an incentive to pursue short sales because forgiven mortgage debt could be considered taxable income throwing more foreclosures into the market.
Finally the Dodd-Frank Consumer Protection Act has faced protests from realtors, builders, banks, unions and consumer groups relative to standards established in the law regarding ability of borrowers to pay mortgages and underwriting standards which are considered excessive. The ruling on these qualifications have been postponed until Jan. 21, 2013, because of the industry protests, however, if these regulations are maintained there will be even tighter burrower qualifications and fewer buyers in the market.
Elections have consequences is something that we’ve all been hearing since Nov. 6. Unfortunately, the consequences of a bad housing market results in reduced consumer spending and continued slowing of an economic recovery. Let’s hope the wicked smart guys in Washington get it and that the fiscal cliff is nothing more than a bump in the road.