Fiscal Cliff Impacts on Housing

With 3 weeks left in the year 2012, the government has yet to reach an agreement to avoid the negative effects of the so-called "fiscal cliff". Without a fiscal cliff barrier, households might have to pay thousands of dollars extra taxes.

According to Investopedia, "fiscal cliff" means a combination of expiring tax cuts and across-the board government spending cuts scheduled to become effective by December 31, 2012. 

In 2010, the government has extended the George W Bush era tax cuts for 2 years. It means that tax breaks on income, capital gains, dividends and estates will come to an end by 31st of December this year. If you remember, in 2011, the government has set up $1.2 trillion in spending cuts to occur within a span of 9 years, starting January 2013.  Last year, they extended a two percentage point reduction in the payroll tax until December 31.

If the fiscal cliff proceeds as planned, there will be a MAJOR impact on our rather already shaky economy which might include going back to official recession; cut in household incomes; increased in unemployment rates and decreased in consumer and investor confidence. 

Lawrence Yun, chief economist of the National Association of Realtors (NAR) says, "If the cliff was to be realized come January 1st and we do go into a recession, job losses could hamper the housing recovery."  "The stability of people's jobs does impact their confidence to spend moving forward," adds Mark Cole, executive vice president of CredAbility, an Atlanta, Ga.-based non-profit that offers credit and housing counseling services. Cole says American families are hesitant about taking on a new debt. They would rather choose home rentals over home purchases. There will be a continuous growth on the booming rental market if the government will fail to find a resolution on the "fiscal cliff". According to NAR, rents are expected to increase an average of 4% in 2013.

Barry Hersh, a professor at New York University's Schack Institute of Real Estate notes that the commercial real estate will also suffer, since retail and office space are directly impacted by the consumer's spending.

Republicans want to cut spending to avoid raising taxes, while Democrats want a combination of tax cuts and tax increases.  Both have agreed that any resolution will include increased revenue but they disagree on where the revenue will come from.

In a Bloomberg article dated December 4, 2012, President Obama wants $1.6 trillion in tax increases over the next decade. He has proposed $600 billion in spending cuts, about $350 billion of which would come from health-care programs. He also counts the $1 trillion in spending cuts Congress passed in 2011, $800 billion in savings from winding down the wars in Iraq and Afghanistan and $600 billion in interest savings, according to senior administration officials. Leaving aside the administration’s call for measures to boost short-term economic growth, which could take the form of tax cuts or spending increases, this would result in $2.4 trillion in spending cuts and $1.6 trillion in higher taxes.

Without the resolution, short-term fiscal cliff impact on the economy will be avoided. The policies from 2012 will be continued. The extension of Bush-era tax cuts will still take effect; the automatic spending cuts will be revoked; the Medicare reimbursement rates will be kept at the current rate.  However, the public debt rises from 69% in 2011 to 100% by year 2021.