When the story of 2012 is written, much of the discourse will likely focus on the word “recovery”–especially with a home sales market gaining momentum, a rental market utterly booming and people rebuilding their lives in the aftermath of Sandy. As 2013 begins, there is a fog of uncertainty clouding the fiscal outlook from the looming “Fiscal Cliff.” When talk of this first gained attention late this past summer, the reality of $500 billion in simultaneous tax hikes and spending cuts set to take effect in January seemed like a variation of Y2K hysteria, though as the final hours of 2012 tick away without a congressional budget agreement we are left steeling ourselves for how this will affect our jobs, homes and families.
More specifically, if the housing market which many feel caused the Great Recession of 2008 is only now beginning to realize robust growth, how will the Fiscal Cliff impact the market in the coming year?
The ripple effects of an estimated 2 million jobs lost by the Fiscal Cliff and unemployment rates stuck above 8% even into 2014 could mean both a decrease in demand for new homes and, potentially, a new wave of foreclosures with jobless professionals unable to make their mortgage payments. Construction of new homes will be another casualty. Here in New York, the mayoral election of 2013 could spell further increases in taxes depending on the winner–as well as the loss of a power position friendly to real estate developers.
Keep in mind, this debate over tax increases and spending cuts is happening in a larger context of the European debt crisis, intraday global market volatility, financial regulation, health care coverage, possible re-evaluation of the home mortgage interest deduction, entitlement benefits, education, energy….the list goes on and on. Exactly how the fiscal cliff will affect different US households in terms of income levels seems equally bleak: those in the middle 20% of income levels ($39,791-$64,484) will see their taxes rise by $1,984; those in the top 20% ($108,267) will see an average increase of $14,173; and the top 1% with income above $506,210 might expect a figure around $120,500.
Cliff notes this afternoon from Washington indicate both sides are inching their way to compromise, with Speaker of the House Boehner agreeing to the idea of raising tax rates on the wealthiest Americans and President Obama saying he could accept tax increases for households earning $400,000 or more per year. That’s good news for a high income state like New York. There are signs that our worst fears won’t be realized, though substantial tax increases cannot be avoided. Housing affordability remains excellent, foreign buyers are on the hunt, and access to credit and mortgages has eased considerably. Rents are already expected to increase an average of 4% this coming year, on top of the 4% increase witnessed in 2012. Even the most dire predictions for a recession in early 2013 admit it would be short-lived. As the saying goes, “We won’t know until we get there” and forewarned is forearmed.