Congress today (Dec. 31) continues to wrestle with what to do about the fiscal cliff, the hundreds of billions of dollars in automatic tax increases and federal spending cuts that take effect at the end of the year unless lawmakers act to avert it.
If Congress does act before midnight tonight, there are a number of things they can do. They could pass a short-term patch to get us into 2013 without major disruption to tax rates and spending programs, or they could take some large-scale action to avert the cliff and make big budgetary changes at the same time. If they don’t act by midnight tonight, and the country goes over the fiscal cliff, they could still take action early in 2013 to address tax issues and spending cuts, restoring some provisions retroactively. There are many scenarios and, as of this writing, it’s impossible to know exactly how things will play out.
Negotiations were conducted over the weekend and were expected to proceed all day today. NAR will provide an update to its members once negotiations are ended.
With this very fluid situation as a backdrop, NAR Chief Economist Lawrence Yun and NAR Director of Tax Policy Linda Goold sat down last week, on Friday, Dec. 28, for a short discussion on what real estate interests are at stake in this debate. Among other things, if no action is taken, tax rates could rise across the board to their 2003 level, before they were lowered by the Bush-era tax cuts. That means, among other things, the top tax rate could revert to 39.6 percent, from 35 percent today. Tax rates for lower income tax brackets would also rise.
The capital gains tax rate could rise as well. It’s currently at 15 percent, and it could possibly return to 20 percent. Should that happen, most home sellers should nevertheless remain protected from a tax increase upon sale of their home because the $250,000-$500,000 caital gaims tax exclusion remains in place, so only sellers whose gain is more than the exclusion amount would face the higher tax rate.
The alternative minimum tax (AMT) could change and become applicable to far more tax filers than is the case today. Goold says more than 30 million households could find themselves facing an AMT hit, up from about 4 million households today.
And mortgage cancellation relief, which helps underwater sellers who’ve had some mortgage debt forgiven by their lender, could lose that relief—at least temporarily— because it’s set to expire at the end of the year.
These are just some of the real estate impacts. In the 6-minute video above, Goold and Yun talk in more detail about what to look for should Congress end the year without taking action to avert the cliff.
To respond to NAR’s Call for Action that Congress should do no harm to real estate by considering changes to the mortgage interest deduction, either as part of the fiscal cliff discussion or as part of broader tax reform in 2013, go to www.REALTORActionCenter.com.
If any more evidence is needed that home sales are recovering we have it in NAR’s latest pending home sales data, for November, which were released last week. The index is up for the third straight month and it’s reached its highest level, 104.6, in more than two years, when households were rushing to buy before the home buyer tax credit expired.
NAR Chief Economist Lawrence Yun says the strengthening housing market is based entirely on improving fundamentals: continuing economic growth (albeit at a moderate pace), improving jobs picture (again, no where near where we’d like it to be, but heading in the right direction), improving consumer confidence as home prices strengthen, and growth in the number of new households.
What’s encouraging about the latest data is the improvement is happening despite continuing difficulties households are having obtaining financing. Think of how much better the market would be if lenders would return to the underwriting standards they had in place before the boom, when the standards were reasonable and safe rather than overly restrictive as they are now.
The big concern today is what the federal government will do. In the short term, you have the fiscal cliff looming in just another day. If lawmakers can’t forge a budget agreement, hundreds of billions of dollars in federal spending cuts and tax hikes will take effect, which Yun says could send the economy into recession because it would take a 4-percent bite out of the economy.
In the longer-term, we have some unresolved regulatory issues coming up, including the qualified mortgage (QM) and qualified residential mortgage (QRM) rules, as well as the international banking protocol known as Basel III, which could impose new capital requirements on banks. These three matters taken together are casting quite a pall over lenders. They’re concerned they’ll have to hold back more capital and meet certain minimum underwriting requirements because of these rules (none of which has been enacted yet, but they could be enacted soon). So, how the federal government actually comes out on these rules could have a big impact on the availability and affordability of mortgage financing.
As of right now, though, the market is improving on its own, thanks to the slowly improving economy. Now we just have to see if there will be any shocks in the days and months ahead.
Money laundering isn’t an issue that comes to mind when you’re trying to get a transaction closed but it’s enough of a problem in real estate that NAR and the U.S. Department of Treasury got together a short while ago and created guidelines to help you identify and respond to its signs.
How often does it happen? The Treasury Department doesn’t track the issue in a way that enables us to get a precise picture of its prevalence in real estate, but we know using federal financial crimes data it’s a significant matter, says Michael Rosen, a Treasury policy analyst.
The problem is more pronounced in commercial real estate, Rosen says. White collar criminals turn to commercial real estate to integrate ill-begotten gains into the economy because dollar amounts can be high and transactions complex, with different corporations sometimes involved, including off-shore corporations that wire money in from accounts that aren’t regulated by the U.S.
In residential real estate, amounts and frequency tend to be smaller than in commercial, but even so it shouldn’t be thought of as out of the ordinary that someone might be trying to launder funds through a home purchase. Money from illegal drug sales is often behind these home purchases.
The guidelines NAR and Treasury developed are organized into three types of risk: geographic, transaction, and customer. When you have a transaction that appears to fall into one or more of these categories, you want to conduct a little bit of due diligence to see if you need to give law enforcement officials a head’s up. Geographic risk applies to the origin of one of the parties, often the buyer. Some countries have weak financial controls or they’re on a federal government watch list. If you have a party from one of these countries, you’ll want to take a minute to get more information to see if something’s suspect.
Customer risk is mainly an issue in commercial real estate and applies to companies that have a shadowy purpose or their business interest in a property isn’t clear. Again it’s just a matter of doing a little due diligence to see if there’s something not right.
Transaction risk has to do with the source of purchase money, or the amount of cash the buyer’s putting up, or something in general that seems out of the ordinary
Bottom line, money laundering doesn’t happen a huge amount in residential real estate, but it happens, and the guidelines are intended to keep the number low by arming you with a few simple tips so when a deal involving possible illegal funds comes your way, you’ll suspect it for what it is and let authorities know.
The guidelines also serve as a reminder that anytime you accept $10,000 or more in funds, for an earnest money deposit, for example, you have to file a federal form with the IRS. That’s been the law for a while, and if the guidelines do nothing else, they at least remind you of your duty in these cases. With the $10,000 threshold, compliance isn’t voluntary.
When we look back on 2012 a long time from now, it may be viewed as the first year of the recovery, the year in which real estate reversed its course and moved in a more positive direction.
With that in mind, here are 13 reasons — courtesy of REALTOR® Magazine’s online news — why real estate pros can look forward to next year:
1. There’s greater optimism about increasing home values.
2. More new households are forming.
3. Home shoppers are feeling a greater sense of urgency.
4. Home ownership remains a goal of members of the Millennial generation.
5. Foreclosure starts are falling to pre-housing-bust levels.
6. Interest rates should remain low through next year’s selling season.
7. Loan demand for home purchases is climbing.
8. More Americans say it’s a good time to sell.
9. The number of improving housing markets is going up.
10. Job creation is expected to provide a much-needed boost to the commercial sector.
12. As housing values rise and equity returns, fewer home owners are underwater.
13. Real estate is contributing to an overall economic recovery.
That’s not to say there aren’t challenges. Lending remains tight, there’s a large foreclosure backlog, and regulatory challenges and the fiscal cliff loom ahead. But on balance, real estate appears to have a bright future in 2013.
The “fiscal cliff” has quickly become a commonly used term, but exactly what it means isn’t all that clear, especially for real estate. At it’s most basic level, it refers to sweeping tax cuts enacted a decade ago that will expire at year’s end, so tax rates will automatically rise to where they were before, while at the same time automatic spending cuts—the sequestration enacted when the government’s borrowing limit was raised a year ago–will take effect. Thus, the economy faces a two-pronged hit: taxes going up while federal fiscal spending goes down.
If Congress does nothing, that double hit would mean a negative economic impact of about $650 billion, enough to shrink the economy by 4 percent and push the country back into recession, says NAR Chief Economist Lawrence Yun.
For real estate, that has the potential to derail the recovery that’s been slowly taking hold. Foreclosures would rise, home values would drop, hurting households but also hurting FHA, which could get hit with another wave of bad loans. That could put FHA into financial trouble.
Against this background, the federal government will be looking at a lot of options for averting the cliff while also lowering the federal budget deficit for the long-term. That puts the mortgage interest deduction in the spotlight. But is it a good idea to make changes to that tax provision?
Without a doubt, changing the rules of the game on MID now would mean a tremendous hit on real estate markets and household finances, and it could deal a blow to the broader economy, says Yun.
He and NAR economist Danielle Hale look at the different pieces in play under the fiscal cliff debate and also the economic impact of changing MID in the 9-minute video above. The information is intended to be helpful as you try to put the fiscal cliff conversation into perspective.
Read more on the pro and con of modifying MID in a Dec. 10 segment of The Diane Rehm Show.
There are academics and there are consumers, and on the topic of whether the mortgage interest deduction should be modified as the federal government looks for ways to shrink its budget deficit, the opinions couldn’t be more divergent. Consumers are for preserving MID, because it’s one of the middle class’s key incentives for wealth-building. Academics? Not so much. To them, MID should be on the budget-cutting table.
That’s pretty much how the views divided up on The Diane Rehm Show yesterday morning, which brought together a handful of economists to look at MID in the context of the fiscal-cliff debate going on in Washington.
Among the economists, Seth Hanlon of the Center for American Progress, Eric Toder of the Urban-Brookings Tax Policy Center, and Ed Pinto of the American Enterprise Institute, said some type of phase-down or overall cap on all itemized deductions should be looked at. The lone defender of MID, NAR Chief Economist Lawrence Yun, said in the real world, the deduction is not and has never been the answer to the country’s economic woes. MID has not only been in place over the last 99 years as the U.S. became an economic superpower, but it has become so important to the middle class that tinkering with it, especially now, could greatly destabilize the economy.
“Some economists argue that the mortgage interest deduction is holding back economic growth,” Yun said on the popular radio show, which airs on WAMU 88.5 FM and is nationally distributed by NPR. “I would argue the other way, that homeownership provides incentive for people to work hard when thinking the long-term vision.”
The lion’s share of about a dozen callers to the show agreed with Yun. One said he’d moved to this country and worked for eight years to be able to afford a home and to take advantage of the mortgage interest deduction.
MID “was meant to give people a chance and opportunity to have some liquefiable asset in case they get into a financial disaster later on,” said another caller.
Toder of the Urban-Brookings Center says MID shoud be transitioned over a 10-year period from a deduction to a flat credit. “With a credit, if you have $1,000 of mortgage interest and we have an 18 percent credit in our plan, you’re going to get $180 no matter—of savings directly—no matter what your tax bracket is. So it’s just better targeted at people of all tax brackets.”
But Pinto of AEI says the credit isn’t much of a better idea than the deduction. “it’s going to distort housing once again, and we’ve been distorting housing all too much, particularly home ownership,” he said, claiming that today’s standardized deduction, which households can take on their tax return without itemizing, is enough to cover the interest on most household’s mortgage. In his statement, Pinto didn’t account for the deduction home owners can take for property taxes.
The economists challenging MID pointed to the experience in England, which phased out their version of the mortgage interest deduction over many years, and saw little effect on home values over time. But Yun said that the comparison is misleading, because England had an acute shortage of market housing and values would have gone up no matter what simply on the basis of supply and demand. “Housing start activity in England was much lower in proportionately compared to the U.S.,” Yun said. It “was just a supply restriction that occurred in England.” On the show’s Web site, a listener who’d lived in England for 10 years and owned a home there agreed that the comparison was spurious.
One of the last callers on the show summed up consumers’ concerns, saying the phasing out of MID just looks at one side of the debate budget and misses the impact it will have on the middle class. “You’re doing everything right, saving for college, paying life insurance, etc., you start phasing out your tax benefits,” he said. “You’re absolutely killing the middle class. . . . You can’t—it just—you can’t look at one side of the ledger. ”
Learn more about the federal government’s fiscal-cliff debate and possible impacts of making changes to MID as a deficit-cutting measure in a REALTOR® Magazine video released yesterday with NAR Chief Economist Lawrence Yun and NAR economist Danielle Hale.
Mountain climbing: it’s the ultimate individual and team sport. In many ways it parallels working in real estate. You need to set an objective then find out what it’s going to take to accomplish your goal. Then you have to stick to it and continue to push through any unforeseen obstacles. And if you’re working in a team environment, you must lend a hand to make sure all members of the team meet the target at hand.
“I relate it a lot to the real estate business,” said Rick Davidson, president and CEO of Century 21. “It teaches you to be nimble, to move at the speed of the market and your clients, and to do what’s necessary to meet the objective at the end of the day.”
Davidson, who has been an avid high-altitude climber since the 1990s, decided to combine his extreme sport passion with another endeavor – fundraising for Easter Seals, Century 21’s philanthropic partner benefiting children with disabilities. So in 2006, Davidson launched Climb for Kids where he annually assembles a team to summit a mountain in order fundraise while inspiring those around them.
“Our business is all about the community,” Davidson said. “And we owe it to our communities to give back and truly be active participants.”
This year, Davidson successfully led the Climb for Kids team up Pico de Orizaba and Iztaccihuatal, Mexico’s highest and third-highest mountains respectively. He was joined by Scott Becker of Century 21 New Millennium, Alexandria, Va., Steve DuBrueler of Coldwell Banker Premier Properties, Winchester, Va., Greg Harrelson and Brendon Payne of Century 21 The Harrelson Group, Myrtle Beach, S. C., Angela Lieb of Century 21 Real Estate LLC, St. Louis, Mo., and Jeff Simon of Century 21 Affiliated, Madison, Wisc.
The team of seven climbed the 17,000- and 18,000-foot mountains in a span of eight days starting Nov. 23. What’s more, it was the first high-altitude climb for four of the seven team members.
“To get those four people to take a risk and make a commitment so significant, and then get out and make it happen, it says a lot about the inspiration,” Davidson said. Continue reading »
Low inventories have created a seller’s market, and your buyers may be tempted to write multiple purchase offers on their favorite listing, for instance, as well as the close second.
On the one hand, it may increase the odds of their getting one of the two homes they want. But is it worth the legal risk if the buyer needs to back out of one of the offers? They could end up in multiple fully-executed contracts to purchase if the offers weren’t written with adequate contingencies allowing them to cancel. They could be accused of breaking a good faith covenant and face major legal ramifications.
How would you advise your client?
An Accredited Buyer’s Representative course may help.
“Never let your clients enter into multiple contracts without intent to buy,” said instructor Adorna Occhialini Carroll, CRB, ABR, GRI, broker/owner of Realty3 in Berlin, Conn., and president of Dynamic Directions, Inc., an international sales training consulting firm. This was one of many important buyer-related topics covered the debut of a new ABR class at the National Association of REALTORS® headquarters in Chicago last week. About 25 REALTORS® from around the country participated in the two-day VIP ABR course, covering everything from buyer’s representation agreements handling objections.
“Our hope is to expose the course so that brokers will recommend the ABR designation to their agents as an essential key component of their professional development,” said Carroll.
The course is designed for any REALTOR® active in real estate. In order to achieve the actual ABR designation, you also need to take one elective course and have proof of five closed transactions where you have represented the buyer.
NAR First Vice President Steve Brown, broker/owner of Irongate Inc., REALTORS® in Dayton, Ohio, was one of the course attendees. Continue reading »