Economists are holding their breaths this holiday season, wondering about the economic impact of the government’s budget negotiations and the fiscal cliff we’ll plunge off if a deal isn’t done by January 1.
While we blithely push our shopping carts down the aisles of Target and Toys-R-Us, an unprecedented re-structuring of government spending and taxes is in the works, and it all has to get settled in the next 25 days by people who just want to go home, and who all seem to hate each other’s guts.
On the table for the housing market: capping the amount of mortgage interest wealthy folks can deduct from their taxable income, and eliminating the tax exemption on debt forgiven when a bank agrees to take a loss on a home being sold for less than the mortgage amount.
The National Association of Realtors is working in deadly earnest to kill the cap on mortgage interest deductions, though it is widely favored by economists of all stripes.
At Redfin, we tend to think the simplest, most direct way to measure how man-made catastrophes and windfalls affect economic activity is to ask active home-buyers what they think. After all, if the fiscal cliff doesn’t make you hesitate about a million-dollar home purchase, you probably won’t hesitate about any other purchases either. And active home-buyers are people we know how to find.
As many said in the survey, most don’t make enough money, $250,000 per year, to have a cap even apply to them.
But that doesn’t mean home-buyers are immune to government action. General uncertainty about the possibility of economic austerity and political chaos has given pause to folks about to make the biggest purchase of their lives. Five percent of the respondents who described themselves as buying a home with Redfin in the next 12 months are now putting the purchase on hold, and another 23% have said they’ll proceed more cautiously.
What we didn’t ask about was a possible end to the exemption on debt relief. If that tax comes back, it could send the market back to 2009, because no one will be able to accept the banks’ forgiveness on mortgage debt, deciding instead to wait for a foreclosure. In many places, short sales, where the bank has agreed to let a home-owner sell the place for less than he owes on his mortgage, are half the market.
As Redfin Orange County agent Paul Reid noted yesterday:
In an area like Orange County, where I work, the REO inventory– these are foreclosures put up for sale by the banks — is miniscule. As of this morning, there are 104 “Active” REOs on the MLS in the entire county. In comparison, there is a total “Active” inventory of 3,504 homes and condos. The short sale “Active” inventory is 335. Where the numbers really stick out is in the “Pending” sales category. As of right now, there are 6,059 homes in Orange County in escrow. Of those, only 267 homes are REOs. More than half, 3,216 homes, are short sales. The remainder are standard sales. If you remove the relief act from the equation you would likely see a significant drop in the number of short sales, but because of how slow the REO process is, you wouldn’t likely see a proportionate increase in the number of REO listings.
But relax, we think the exemption on taxing debt relief isn’t going away. In the hurly-burly of these budget negotiations, somebody just has to remember to extend it.