Fiscal Cliff: What’s at Stake for Real Estate

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.

Robert Freedman

Robert Freedman is director of multimedia communications for the NATIONAL ASSOCIATION OF REALTORS®. He can be reached at

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  1. What about the housing relief act re: short sales that will expire Dec. 31 Isn’t that a triple threat?

  2. dave stefanides

    Thanks to both Dr. Yun and Ms. Hale for sharing this important conversation. The effect that Dr. Yun referred to as “wealth destruction” is perhaps the least understood but most widely felt by American homeowners, consequence that could come about with changes to the mortgage interest deduction or to the GSEs’ guarantee.

  3. As a Realtor..we get deep & important questions almost dailey..concerning housing and the Fiscal Cliff.. Just reading info conerning the coming problem to Real Estate..some of these remarks contained in this informantion is clear and yet not clear becuase the Government has written so many things that can or can not be done conerning ‘HOME OWNER SHIP”..and our government has a mind off its own..If they make just one change (and they will ) put the out from Selling Realtors in the position ask “what does this change do to our industry?.. TOD

  4. I agree with Dave on this one. This is a great conversation that more people nee to know about. A lot of people ask about legislation and politics “How does this affect me?” and I think this piece addresses this question!

  5. I don’t think that real estate market will be significantly affected by the fiscal cliff.

  6. Ron

    I am always amused by those who voice their opinions which have been formed on the basis of nothing that is real. For those of you who believe that the “Fiscal Cliff” will not affect, or have very little effect on real estate, it’s time for a reality check.

    First of all, EVERYONE and our entire economy will be adversely affected by what these Beltway Boobs are doing in Washington. We are now hearing that Speaker Boehner is ready to flip on the issue of raising taxes and the debt ceiling. Additionally, we don’t know what is going to happen with the “ghost tax” on short sales, tax rates (on the middle class, capital gains, etc..), or sequestration. This causes great uneasiness within the business community and keeps businesses from committing to hiring more employees or letting go of their cash in other ways, as well.

    As for real estate, interest rates will, according to the Fed, be kept (artificially) low until unemployment reaches 6.5% or below. To accomplish this, the Fed is buying mortgage-backed secuities and Treasury securities to the tune of 85 billion dollars a month for that entire time (it is widely believed that will take at least until 2015). This would mean a “stimulus” investment of approximately 2.4 TRILLION dollars.

    So, it begs the question, “How long can we monetize the debt by printing more money before we end up like Greece, Spain, Italy, France or any other European Union nation?” Which is, by the way, exactly what this president wants. What would YOUR checkbook look like if you ALWAYS spent more than you had coming in AND had to borrow $0.40-$0.50 of EVERY dollar you spent???? These chickens will be coming home to roost sooner than later and it won’t be pretty.

    At the end of the day, you will see inflation, much higher interest rates and this great nation will find itself in a deep recession (if not depression). The present course of action is simply UNSUSTAINABLE but, we continue to live with our collective head in the sand while Washington spends us into economic oblivion. We WILL find ourselves owning the title of the greatest entitlement country on earth.

    When I first entered real estate, interest rates were just beginning to recover from all that Jimmy Carter had done. There were homeowners who had mortgages at 17-18%. Needless to say, hardly anyone was going to the bank to get a mortgage. Creative financing was the order of the day. REALTORS were using mortgage instruments most agents today haven’t even heard of.

    We are now split down the middle with one side being the taxpayers and the other side pays no Federal tax whatsoever. Yes, there are many who need what the government provides but, there are so many more that don’t and get it anyway.

    Sadly, those things that need to be done to fix what’s wrong with this country will never be done as long as those in control place more emphasis on staying in power than doing what is right. This country needs term limits, and all laws that are passed should apply equally to ALL people (including all politicians). If those running this country had to be on Social Security, Medicare and Obamacare, for example, do you think for a moment any of these programs would be broken or underfunded? NO! But, that is not the case.

    So, get ready for a very bumpy ride because what happens in America, doesn’t stay in America.

  7. We keep talking about the housing market as “recovering”. A couple of analogies may be helpful.

    The housing market in the past two years is recovering in the same way that a terminally ill patient who was given pain killers, feeling better in the short term, is “recovering”.

    Or a closer one – a family who was headed for bankruptcy because their expenses have been outpacing their income for years receives an inheritance equal to one year of their income. They pay off no debt and they spend more money the year the inheritance landed.

    The sick person is not recovering for having received pain killers. The fiscally irresponsible family has not experienced recovery for having received an inheritance. The future still holds for them, pretty much what it had previous to the “stimulus”.

    Neither has the Real Estate market been recovering because the federal government has been borrowing money and giving it to companies, the unemployed and the fed who has been artificially deflating interest rates. These things are all temporary and MUST stop.

    Once they stop, we will finally be able to have our recession and get this overwith. I for one wish we could have had it in 2007 and 2008. As it is, we get to have it now – only much deeper in debt.

    This is not a real recovery people.

  8. Mike

    This makes me wonder if the ability to pay debt off over time is now so many generation away that it will never be paid at all. I am sad that my generation is still passing the buck to the next, there was a time when I could have paid off my portion of debt in this country, but now it’s out of reach.

  9. val

    I guess we should not use credit anymore forbuying anything

  10. After reading each of these posts. I must say that in todays world more people DO NOT realize just what we are headed for. I totally agree with Ron. I entered in the Real Estate Industry in the early 80’s and had the pleasure of the riding the wave, creative financing was the way to go ,as I watched my sister who was then working with one of the largest lenders(now debunked), the Cofi, Cosi and no income verification loans were going at a rate of 5 out of 5 deals done, hence the mess we are in among many other bad decisions made from your government. We are headed for big trouble, If our Mr. Boehner, allows for the recision of the Mortgage Interest Deduction our industry will all but -be no more. While we wait and see what our future will hold the expenses, vacations and hiring of incompetent individuals to run a great nation continues. Scandles abound and lives are lost—– But this is what we signed
    on for 4 more years. People need to become educated in the Idea of THEIR future and take time not only to read but understand what lie ahead. As the RPAC Chairperson for my Board
    I relish the idea of State Legislature NO#2157, As a BPOR Agent I do the Assignemts wondering when will it stop. If we smarten up I am thinking 2018 , should we continue on this path – All I can say is NO COMMENT!

  11. I have not heard more about the 3.8% tax on homeowners once they seller their home that was discussed in the beginning of 2012. Hopefully, Congress did not pass this bill. Are you aware of the outcome of this?

    Thank you.
    Peggy Streff, Realtor

  12. The information is intended to be helpful as you try to put the fiscal cliff conversation into perspective.