The Looming Fiscal Cliff And How It Will Affect The Housing Market

Posted by Joseph Epifanio on Saturday, December 29th, 2012 at 11:00pm

Obama and Boehner discuss the fiscal cliff and how to save the housing market

While I sit here writing this at 8 pm on Saturday, December 29, most of the people in the city are out enjoying their evening. Be it dinner and drinks, shopping, or visiting one of the many fantastic local bars, Americans everywhere are carrying on like normal, contributing to a recovering economy under the caring guidance of government tax breaks and growing consumer confidence.

It all seems great on the surface, people out spending money, having a good time. That is until you take into consideration the fact that this may well be the best weekend that our economy enjoys for a while.

The fiscal cliff looms, and it is not something to be ignored. With a politically divided country, and thus a divided government, it sometimes seems that nothing can ever get worked out in a timely fashion. Frustrating for citizens who vote these very same politicians into office in order to represent their views and wishes.

Now, regardless of anyone’s political views. Be it republican or democratic. We can all agree that to allow our country to continue over the edge of this ‘fiscal cliff’ would be somewhat undesirable.

With that being said, I am not here to discuss party politics. Let's spend some time to take a look at how the upcoming tax adjustments could affect America’s blossoming housing market, and how that, in turn, will affect all of us.

So a few years ago we experienced a global economic crisis. Banks closed or merged, business’ closed, homes were lost, jobs are gone, and we all stood in shock pointing fingers at the very banks we were then asked to bail out further. It was a low point in the history of this great nation, a proud country full of proud people who like to consider themselves at the forefront of the modern world.

National Real Estate Prices - Naples Florida Real Etate News

As all of this unfolded the depreciation of property began. People were scared, and a lack of confidence in our type of economy can have shocking consequences. As the world shook, the government stepped in to help its people with tax breaks, including some generous schemes to help homeowners who now found themselves in debt, to write off the remainder of the money they owe, and accept the proceeds as payment in full. This is called a short sale 

With the fiscal cliff, we are also at risk of losing the provision that erases taxes on a home that is sold for less than what is owed to the bank. Hence no more short sales.

Not only are short sales a faster way for lenders to get bad loans off the books, it also helped the people, which in turn helped to boost the economy further.  Bank of America reported 62,000 borrowers have completed short sales that actually saved them $7.4 billion in debt or an average of about $120,000 each!

The impact of the increased taxes could be catastrophic for a fragile housing market that has only recently been showing signs of improvement. With the expiration of the tax break sellers owing more than what their home is worth would also have to write a big check to the tax man, and with one in four homeowners owing more than their homes value, you can imagine the impact this would have on the market.

The economic improvement would at least stutter, if not stop altogether. Owners would think twice before selling when taking into consideration the extra money they would have to find in order to pay the required tax. 

Before the housing collapse, the forgiven mortgage debt was considered as ordinary income and taxed accordingly. Under those rules, the average household would owe about $19,000 tax on the average settlement relief so far.

After the collapse, Congress passed the Mortgage Debt Relief Act. This protects forgiven debt from taxes. The law was extended in 2010 but is due to expire at the end of the year unless Congress acts. The law helped to pull the housing industry out of the worst recession seen in almost a hundred years. To bring back this tax at this time could, in theory, jeopardize almost a quarter of American home sales in the upcoming year.

If homeowners decide not to pursue the short sale option and instead allow the property to be foreclosed, this would have a more negative impact on the neighborhood and on the overall local home values.

With short sales allowing lenders to save the cost of seizing and maintaining homes, as well as the fact that the average price of a bank-owned property transferred in short sale is about $30,000 higher than that of a  foreclosed home, banks and consumers alike must all be hoping that the current talks result in a deal that would allow the taxes on selling homes to stay at a lower rate, thus helping to continually improve the housing market for the 2013 year.


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