We begin this year teetering on an economic recovery. The macro economy remains weak, with unemployment high, real GDP growth low and job growth anemic. Yet our housing economy, especially in Wisconsin, has been steadily improving, with sales up for 17 straight months, prices stable, inventories shrinking, affordability improving and interest rates — both now and for the foreseeable future — at historic lows.
So what’s missing? Why are we economically shaky as opposed to thriving? Many economists say uncertainty is a major factor in holding the economy back. From a business perspective, economic insecurity causes firms to hold off on hiring or making major capital investments. Individuals are more inclined to put off major purchases like a new home. Last year’s national elections added more uncertainty, which was exacerbated in Wisconsin with the numerous recall efforts of the past few years. Even now that the elections are over, other major national issues remain and continue to add to economic uncertainty — issues like implementation of the Affordable Care Act, known as “Obamacare,” as well as the major taxing, spending and debt limit debates that were kicked down the road with the recent agreement that temporarily avoided the “fiscal cliff.”
What does all this mean for the housing sector and the real estate industry? That’s unknown. The “fiscal cliff” legislation, H.R. 8, had several key real estate-related issues worth noting. The legislation extended the mortgage cancellation relief for one more year so homeowners won’t have to pay taxes on mortgage amounts reduced in a short sale or foreclosure. Also extended for one more year were mortgage insurance premium deductions for filers earning less than $110,000, and the 15-year straight-line cost recovery for qualified commercial properties. The 10 percent tax credit, up to $500, for energy improvements to existing homes was also extended through 2013. Limitations on total itemized deductions were repealed for taxpayers earning less than $250,000, or $300,000 for joint filers, but increased and indexed for inflation for those making more. Finally, the “fiscal cliff” deal retained a capital gains tax rate of 15 percent for those with incomes of $400,000 (and $450,000 joint) and less, but for those earning more than that, the rate increased to 20 percent. The $250,000/$500,000 exclusion for the sale of a principal residence remains in place.
As you see, this action by Congress provided limited certainty, but only temporarily.
From a real estate perspective, perhaps the greatest remaining uncertainty stems from the continued speculation that the next round of Congressional tax discussions will include efforts to reduce or restrict the mortgage interest deduction (MID).
Most real estate professionals wince at the prospect of weakening this long-standing tax promotion of homeownership, but tax reformers in Congress see it as the potential mother lode of new revenues, worth an estimated $100 billion a year in new money — that’s billion with a “B”. Even if they don’t take it all, the likelihood of tapping into part of this stash of cash is high, despite the intensifying lobbying effort against it by the National Association of REALTORS® and other industry partners.
For Wisconsin homeowners, the stakes are high in this MID battle. According the Wisconsin Department of Revenue (DOR), of the approximately 1.54 million owner-occupied houses in Wisconsin, 1.03 million, which is 67 percent, have a mortgage. A total of 803,300 taxpayers claimed the deduction for mortgage interest in 2010 for a total of $6.26 billion. This means the average taxpayer claiming the MID subtracted $7,800 from his or her taxable income. Assuming a marginal tax rate of 25 percent, the average taxpayer saved $1,950 as a result of the MID. That’s a total tax savings in Wisconsin alone of $1.56 billion in 2010!
It is also important to note that the loss that would be experienced by eliminating the MID is not a one-time event. Homeowners would lose out on these potential tax savings each and every year. According to the DOR, the present value of these lost savings could total over $51.8 billion. With the total of all owner-occupied real estate in Wisconsin in 2011 valued at $301.2 billion, if the lost tax savings were fully capitalized into the price of housing, the average home value in Wisconsin would decline 17 percent. Assuming the 2011 median home price of $152,200, the decline in value could mean a loss of $26,200 for a typical Wisconsin homeowner.
... Feeling like we’re teetering a bit?
As we begin 2013, we should embrace the improving trends on the horizon in our marketplace but also realize the threats. Each of us must actively engage and educate our political leaders and policymakers, in Washington and Madison, to make sure they choose the right policies. Stay tuned for the details to come. Oh, and by the way, Happy New Year!
Mike