The new year is bringing new issues to discuss and one of the more prevalent issues is the temporary avoidance of the "Fiscal Cliff". The fiscal cliff refers to a set of economically damaging tax hikes and spending cuts that were scheduled to become active in 2013. Despite the uncertainty created by potentially falling off the fiscal cliff, the news for the housing market had continued to be generally positive. The NAHB and Wells Fargo Housing Market Index measure of single-family builder confidence rose for the eighth straight month to a level of 47 in November, which was the highest level since April 2006. Although it was good to see the progress of 2012 remain positive and consistent regardless of the pending fiscal cliff, it would have been very bad to actually go over the cliff. As I mentioned in the opening sentence, however, the fiscal cliff was temporarily avoided and that is good news for housing in the short-run.
The enactment of H.R. 8, the American Taxpayer Relief Act of 2012, will permanently extend ALMOST all of the 2001/2003 tax cuts. The legislation prevents a fiscal drag of approximately $600 billion in 2013, which would have been substantial enough to push the currently weak economy into recession. In turn, that would have reduced demand for both owner-occupied and renter housing as well as threatening the ongoing recovery for home building. Luckily, that outcome has been prevented, but 2013 may be a year in which comprehensive tax reform is under legislative consideration.
Although there are some issues to be further discussed by our government, lets take a look at a few of the Real Estate benefits resulting from the fiscal cliff avoidance. H.R. 8 permanently extends income tax rates paid by those with less than $450,000 in adjusted gross income ($400,000 if single), this includes the rates paid for capital gains and dividend income. Since a large amount of home builders are organized as pass through entities they pay their business income taxes on individual income tax forms. This will help keep home builders active which is important as home builders are crucial to the continuing recovery of the housing market. The new law also sets permanent rules for the estate tax, the AMT patch and other elements of the 2001/2003 tax cuts.
As I stated in the beginning of the post, the temporary avoidance helps Real Estate in the short-run. The long-run is still to be determined due to a few negative results from H.R. 8. One of the more significant negative results is that the law reinstates the Pease itemized deduction phase-out. This will slightly reduce the value of itemized deductions; for example, charitable giving and mortgage interest. The reinstatement of the Pease rule implies that policymakers are considering itemized deductions, such as the mortgage interest deduction, as a possible revenue increase in future fiscal debates. Those conversations, or debates, will be held in February in which the debt ceiling will need to be raised and the sequester on government spending (delayed by American Taxpayer Relief Act of 2012) will need to be addressed. The year of 2013 may possibly be defined by a collection of "mini-cliffs" in which home buyers and builders will be affected in some way.