Faaaaalllllliiiinnnnggggg of the Fiscal Cliff – what does that mean for Real Estate?

There has been a lot of news lately about the fiscal cliff and what happens if we go over and fall off the cliff. But what does that mean for real estate? The National Association of Realtors published a video about the impact that can be found here. There are the larger impacts – like the impact on job creation, GDP and others, but  the main, most direct impact of the fiscal cliff on real estate depends on how Congress and the White House deal with the mortgage interest deduction (MID).

First, a bit of background on the cliff. There are tax cuts that are set to expire at the end of this year which will result in an estimated $500B in revenue and a reduction of the deficit of about $615B. The main components of the fiscal cliff include, but are not limited to:

  • Payroll tax increases
  • There will be an end to emergency unemployment benefits
  • Cut to Medicare reimbursement rates
  • Addition of a 3.8% tax surcharge for Obamacare and ts components
  • End to certain business tax expenses
  • Budget cuts for defense and non-defense spending

A part of the negotiations is the MID. One reason the it’s mentioned as a source for additional revenue is because the CBO and OMB estimate that the MID is the second or third largest of all tax expenditures, estimated to be around $90B in 2013. It is generally an incentive for homeowners that provides the biggest benefits to people that live in high cost of living areas, like DC. Nationwide there are aprox 75 Million homeowners and about 37M claim the MID every year on their taxes. Reducing or removing the MID is also projected to decrease the  value of homes. As prices decline, an estimated $17 Trillion of wealth in homes, will be reduced. Reduction in home prices of course affects all property owners as their equity is reduced.

What does that mean to you? Well, The Diane Rehm Show featured several economists and consumers to discuss just that. In an nut shell: if you are underwater and home prices decline, you’re now further underwater! Also, declining home prices affect sellers ability to sell their homes. Take a look at Barbara Corcoran’s perspective on this and the general real estate market on MSNBC: