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Fiscal cliff home price dive?

Posted by Scott Van Voorhis December 6, 2012 07:08 AM

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Home prices in expensive markets like Greater Boston are most at risk as Washington scrambles to avoid tumbling over the dreaded fiscal cliff.

Some of the cutbacks in real estate tax benefits could take a toll on housing prices, notes Kenneth Harney, citing a 2010 Brookings Institution study.

Here's a link to the study - it's worth taking a look at if you are at buying or selling over the next year and wonder what impact the fiscal cliff crisis might have on home prices.

If a deal is struck that limits the amount of real estate deductions top earners can take, home prices could plunge by anywhere from nearly 7 to 15 percent, the study finds. This scenario is based capping at the 28 percent tax bracket mortgage interest rate and local tax deductions for high earners - basically couples pulling down more than $250,000 a year or individuals making $200,000.

That may make you a king in North Dakota, but it certainly doesn't make you rich in a high cost market like Boston or for that matter New York or San Francisco.

"Coastal cities with higher rent-to-price ratios tend to show price decreases in excess of 13 percent, while cities in the interior with lower rent-to-price ratios show less," the study notes.

President Obama has championed a cap on real estate deductions for top earners for a couple of years now.

However, other Obama proposals that have been derided by his Republican critics as soak the rich schemes could actually boost home prices if our country's current array of generous real estate deductions were left untouched.

If, for example, tax rates on the wealthy were boosted back to 38 percent, it could actually push up home prices. That's because it would make putting money in real estate, and getting the benefit of all those deductions, even more attractive.

The same goes if Washington were to boost the capital gains tax rate on investments without touching real estate deductions - here again higher earners might simply shift their dollars from stocks to real estate.

Yet while there has been no study yet on this, it's hard to imagine how letting taxes rise on the middle class - one major result of going over the fiscal cliff - would not also exert a major downward pull on home prices.

A typical middle-income household would see taxes jump by $2,000 a year if Congress and the president are unable to work out a deal to halt the draconian mix of spending cuts and tax hikes set to take effect next year, the Tax Policy Institute noted in a study released this fall.

Given the fact that paychecks have been stagnant or falling for a decade, that would significantly reduce the buying power of middle class families, knocking many out of the market altogether. To be clear, the study doesn't say that, but let's just use a little common sense here.

Just about any decision made in Washington now is going to have an impact on home prices, probably down. Stay tuned, we are in for one wild ride!

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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About boston real estate now
Scott Van Voorhis is a freelance writer who specializes in real estate and business issues.

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