Below is a recent real estate report from the National Association of Realtors. President Barack Obama has just signed the American Taxpayer Relief Act of 2012.

On January 1 both the Senate and House passed H.R. 8, legislation to avert the “fiscal cliff.” The bill will be signed shortly by President Barack Obama.

Below are a summary of real estate related provisions in the bill.

Real Estate Tax Extenders:

• Mortgage Cancellation Relief is extended for one year to January 1, 2014.
• Deduction for Mortgage Insurance Premiums for filers making below $110,000 is extended through 2013 and made retroactive to cover 2012.
• Leasehold Improvements: 15 year straight-line cost recovery for qualified leasehold improvements on commercial properties is extended through 2013 and made retroactive to cover 2012.
• Energy Efficiency Tax Credit: The 10% tax credit (up to $500) for homeowners for energy improvements to existing homes is extended through 2013 and made retroactive to cover 2012.

Permanent Repeal of Pease Limitations for 99% of Taxpayers: Under the agreement so called “Pease Limitations” that reduce the value of itemized deductions are permanently repealed for most taxpayers but will be reinstituted for high income filers. These limitations will only apply to individuals earning more than $250,000 and joint filers earning above $300,000. These thresholds have been increased and are indexed for inflation and will rise over time. Under the formula, the amount of adjusted gross income above the threshold is multiplied by 3%. That amount is then used to reduce the total value of the filer’s itemized deductions. The total amount of reduction cannot exceed 80% of the filer’s itemized deductions.

These limits were first enacted in 1990 (named for the Ohio Congressman Don Pease who came up with the idea) and continued throughout the Clinton years. They were gradually phased out as a result of the 2001 tax cuts and were completely eliminated in 2010-2012. Had we gone over the fiscal cliff, Pease limitations would have been reinstituted on all filers starting at $174,450 of adjusted gross income.

Capital Gains: Capital Gains rate stays at 15% for those at the top rate of $400,000 individual and $450,000 joint return. After that, any gains above those amounts will be taxed at 20%. The $250/$500k exclusion for the sale of a principal residence remains in place.

Estate Tax: The first $5 million dollars in individual estates and $10 million for family estates are now exempted from the estate tax. After that, the rate will be 40%, up from 35%. The exemption amounts are indexed for inflation.

Real Estate report can be found at this site: http://www.realtoractioncenter.com/docs/homepage/2013-NAR-Issue-Brief-Fiscal-Cliff-Real-Estate-Provisions-0102-1232.pdf

The Lawhead Team wants to know your thoughts on what is going on in Washington. With the fiscal cliff only days away, what do you think will happen?

U.S. the New Europe?

“What is going on in Washington these final weeks before the New Year is the kind of fiscal fundamentalism that is making Greece, Italy and Spain economic train wrecks. With unemployment so high, real wages falling and so many folks working part time for lack of full time work, the unemployment rate could easily surge into the teens, and no amount of stimulus spending could bring it back.  Clearly, Messrs. Obama and Boehner know a lot about getting elected but on economics they are spread thin. Like the sorcerer’s apprentice, they are courting disaster.”  Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist.

Comment on our blog and let us know your thoughts about what What Is Going On In Washington.

The Lawhead Team has been staying up to date with the upcoming fiscal cliff and would like to share with our readers how it pertains to the housing recovery, particularly the mortgage forgiveness debt relief act.

Impact of the Fiscal Cliff, by Juliette Montoya-Cesena with WJ Bradley Mortgage Capital.

The fiscal cliff, the popular term for the upcoming tax increases and spending cuts if legislators fail to intervene, is weighing on the minds of most Americans. Caught up in the midst of the fiscal cliff debate are pieces of real estate legislation that housing experts say could significantly impact the housing recovery.

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

The Mortgage Forgiveness Debt Relief Act is set to expire on Dec. 31, 2012. The law, enacted in 2007, temporarily amended the federal tax code to enable taxpayers to omit income debt reduction or cancellation on their primary residence. Debt reduction through restructuring of a mortgage, for example, refinancing and debt forgiveness through a foreclosure generally qualify under the law.
 
Why the Expiration Matters

An estimated 11 million homeowners are underwater. Any homeowners who participate in a short sale that closes after Jan. 1, 2013, will be subject to taxation on the amount of debt forgiven if the law is not extended.
 
In addition, the $25 billion settlement states reached with five top mortgage lenders over the so-called robo-signing scandal urges lenders to forgive billions in mortgage debt next year and in the future. The expiration of the tax relief act could deter Americans from taking part in the settlement, according to attorneys general of the participating states.
 
Housing experts argue that the expiration of the mortgage forgiveness debt relief act law would cause significant financial pain for a large group of homeowners who are already under duress.
 
The Mortgage Interest Deduction

As legislators propose ways to reduce the deficit and avert the fiscal cliff, legislators are proposing reducing the mortgage interest deduction.
 
The mortgage interest deduction lets homeowners reduce their annual taxable income by the amount of interest paid on their mortgage. The deduction is the largest of its type in the tax code, accounting for an estimated $90 billion in reduced income tax revenue.
 
The housing industry is fighting changes to the policy, arguing it would hurt the housing recovery, and therefore the economic recovery.
 
“This is the last thing Congress should be considering when what we’re trying to do is stabilize the economy,” Jerry Howard, head of the National Association of Home Builders, told The Hill.

Do you have further questions about the Fiscal Cliff and the Mortgage Forgiveness Debt Relief Act? Please call or email us, The Lawhead Team, Because Two Lawheads Are Better Than One^TM.

The Lawhead Team recently came across and article from Realtor.com about the Fiscal Cliff and what it means for the future of interest rates.

This article on Fiscal Cliff, QE3, and the Future of Interest Rates is from Realtor.org:

The ‘Fiscal Cliff,’ QE3, and the Future of Interest Rates

Economists from the Mortgage Bankers Association sounded an optimistic note at a press conference yesterday afternoon during the organization’s Conference & Expo in Chicago, with predictions that unemployment will go down, home purchase loan originations will go up, and mortgage rates will remain low in 2013. All of these point to a continued housing recovery, but they cautioned that major economic challenges loom that could bring about a reversal — particularly in interest rates.

“The most immediate threat is the fiscal cliff,” said Jay Brinkmann, the MBA’s chief economist and senior vice president of research and education, referring to the deep cuts in taxes and government program spending that will take place at the end of this year if some sort of financial compromise isn’t reached by legislators on both sides of the aisle before then. The Congressional Budget Office estimates that U.S. gross domestic product will fall four percentage points in 2013 if an agreement isn’t forthcoming, which would make it a recessionary year.

Mike Fratantoni, vice president of single-family research and policy development for the MBA, predicted there will be some sort of resolution. “It may not be clean, and it may not be timely,” he added. Any major delays would likely lead to a spike in interest rates and, consequently, declines in home sales.

Over the long haul, interest rates will likely remain below historical lows because of the flight of global capital to the U.S. caused by the continuing European debt crisis and the Fed’s rollout of another round of quantitative easing (often referred to as QE3). This Fed initiative — which will probably last at least a year and possibly as long as two — will involve the central bank purchasing tens of billions of dollars in mortgage-backed securities each month.

“[QE3] wasn’t surprising,” Fratantoni said. “The aggressiveness, the open-ended nature of it, and extreme focus on the mortgage market was a surprise.”

However, if the Fed determines that they’re crowding liquidity out of the market with QE3, they may shift to purchasing longer-term securities such as Treasuries, Brinkmann added.

Article on Fiscal Cliff, QE3 and the interest rates can be found here: http://realtormag.realtor.org/daily-news/2012/10/24/fiscal-cliff-qe3-and-future-interest-rates

The Lawhead Team came across an article written by the Chief Portfolio Strategist at Wells Fargo discussing the affect the election will have on our nation’s market.

The election was the beginning, not the end. By Brian Jacobsen, Ph.D., CFA, CFP^®, Chief Portfolio Strategist

Before the U.S. elections, Republicans controlled the House of Representatives, the Senate was narrowly controlled by the Democrats, and Obama was President. After the election, nothing has changed. It’s tempting to think that means the next few years will be similar to the last two years.  While it is possible, the strong showing by Mitt Romney in the presidential election and the prospect of further shake-ups in Congress in the 2014 mid-term election could force President Obama and congressional Republicans to inch towards compromising on budget issues.

In the 28 presidential elections since 1900 (excluding the current election), the Dow Jones Industrial Average increased 46% of the time the day after the election. When the Dow was down the day after the election, the Dow ended the year down a bit further 60% of the time. When the Dow was up the day after the election, it ended the year up further 85% of the time. In other words, the first day of trading seems to be a pretty accurate predictor of trading for the remainder of the year.

It’s really easy to say, “but it’s different!” Indeed, every election is different. This year, however, there is the eurozone debt crisis, the transition of leadership in China, and the U.S. fiscal cliff. These three issues could come to a head in the month of November, despite the conclusion of  the U.S. elections.

On Wednesday, November 7, the Greek Parliament is scheduled to vote on additional austerity measures, which could determine whether the Greek government receives another round of financing from its lenders. On November 25, there is a regional election in Catalonia, Spain. If the election goes well for Spanish Prime Minister Mariano Rajoy’s party, the Spanish government could ask for a bailout or conditional line of credit, which should assuage investors’ fears about the pain in Spain. On November 8, the 18th Party Congress of China will convene and we should see whether the leadership that is scheduled to take over in China in March 2013 will continue to make important political and economic reforms, or if it will be stacked with individuals who resist change.

On balance, It’s a global market and global politics matter, not just U.S. politics. However, many investors will likely pay close attention to the status of the U.S. fiscal cliff. The combination of tax increases and government spending cuts scheduled to occur as we enter 2013 have been referred to as the “fiscal cliff.” The expiration of the 2001-2003 tax cuts, the expiration of the two percentage point reduction in payroll taxes from 2010, the expiration of emergency unemployment insurance benefits, new health care reform taxes, cuts to doctors’ reimbursements under Medicare, and the budget sequester are all part of the fiscal cliff. But what could really push politicians into action is the alternative minimum tax (AMT).

Without congressional action, the AMT—which was originally enacted in 1969 to target 155 wealthy individuals—will likely saddle 30 million Americans with an additional tax burden they have probably never heard of. The AMT exemption levels were never indexed for inflation, so Congress regularly bumps up the exemption to keep inflation from capturing more and more people in the AMT net. However, congress has failed to make this normally regular adjustment, and will probably get an earful over Thanksgiving from constituents. This could likely push Congress and the president to act on the entire fiscal cliff, punting the problem into the next session of Congress.

As part of the debt-ceiling debate of 2011, the president and Congress formed a “Super Committee” to develop budget cuts, but the Super Committee failed. Well, this time they’ll probably form a “Super-Duper Committee” to construct comprehensive tax reform. The 2014 mid-term election could  be like a voter-referendum on the nature of the reform.

Considering the continued uncertainty about politics, what could move the markets in 2013? The answer is “money.“ It’s no secret that businesses worldwide are holding piles of liquid assets. The money will be put into motion; it’s just a question of where the businesses will expand and seek out opportunity. That’s where a country’s fiscal and regulatory policy will be important to follow: Companies will invest to grow, but where will they do it? They’ll invest where they find a friendly environment, which is probably also where investors should be looking for investment opportunities.

This article can be found at: http://www.wellsfargoadvantagefunds.com/wfweb/wf/funds/commentaries/roundup_201211.jsp?blog_110712

This is a very well written article by Wells Fargo’s Chief Strategist about the fiscal cliff and how congress will react to it.  We strive to provide up to date and pertinent information to our readers.  Please take a look at this article.

What Will Congress Do About The Fiscal Cliff?

The U.S. economy faces a potential recession in 2013 if Congress does not take action to avoid the fiscal cliff. The Congressional Budget Office estimates that U.S. economic output could contract 0.5% in 2013, if all scheduled tax increases and spending cuts take place starting in early 2013. At this point, we do not expect this worst-case scenario to happen. Both parties favor avoiding the fiscal cliff. Of course, their proposals are different.

We have been saying for months that investors will probably not know how Congress will address the fiscal cliff until after the November elections. That’s because neither party knows whether their proposals will dominate the policy decisions. After all, the election will determine which party gains seats in Congress and controls the White House. Fortunately, the election is less than a week away. Therefore, investors may not have to wait much longer to get a clearer picture on how Congress is likely to deal with the pending tax hikes and spending cuts.

A recent Wall Street Journal/NBC news poll asked survey participants about how they would prefer Congressional Leaders to address the deficit problem. The responses suggest that the public is tired of a divided-ineffective government, with 75% of respondents saying that they would prefer that Congressional Leaders compromise over the deficit, while only 15% said that they want leaders to stick with their positions. This suggests that the newly-elected Congress has public support to find some middle ground and avoid going over the fiscal cliff. We don’t expect a wave of bi-partisanship to develop between the two major parties after the elections. But we could see a kind of detente between lawmakers as they address this serious and potentially damaging problem.

We believe there are three scenarios for the fiscal cliff. First, Congress could do nothing, allowing country to go over the cliff and causing a modest recession in 2013. We believe this is the least-likely scenario. Second, Congress could decide to just postpone the tax increases and spending cuts and move the fiscal cliff forward to be confronted in another year or two. This strategy would probably look irresponsible and could lead to a downgrade of the U.S. debt rating. The third and most likely scenario would be a compromise on tax hikes and spending cuts that limits the damage to the U.S. economy but dampens economic growth next year.

History shows that reducing the deficit would probably hurt the economy in the short run but would potentially create a healthier economic environment over the long term. Once the election is over, Congress will need to consider what the economy could endure from a compromise that raises some taxes and cuts some spending.

Congress will need to find an acceptable mix of taxes and spending that both parties can support. This will not be easy, and is unlikely to be done quickly. Nevertheless, investors should get a better idea about the direction that Congress will go soon after the election. If the Democrats retain the White House and control of the Senate, investors should expect proposals that would trade tax increases on wealthy taxpayers for smaller cuts in defense spending. If the Republicans win the White House and pick up more seats in Congress, then there is likely to be some temporary measure to avoid the fiscal cliff as the new Administration works on tax and spending reforms, not just changes to existing rates.

At this point, we believe that the uncertainty of the fiscal cliff could dampen economic activity early in 2013. However, after the fiscal cliff is addressed, we would expect economic momentum to build as the year progresses. For the year as a whole, we currently expect economic output to expand at an inflation-adjusted 2.5% rate in 2013. This would still be slightly less than the 2.8% thirty-year average. However, economic growth would probably be even better if the deficit was already reduced and the country did not face tax increases and spending cuts next year.

The approach of the fiscal cliff has been widely anticipated by businesses and investors. The uncertainty ahead of the fiscal cliff probably dampened business investment and hiring this year. If Congress takes action and avoids sending the country over the fiscal cliff, then companies may be more inclined to invest and hire again. Thus, concerns over the approaching fiscal cliff have already put strains on the U.S. economy. Congressional action to resolve the fiscal problems could open the door for a better economy next year. Congress just needs to get to work and avoid the political impasse that occurred during the debt-ceiling extension and U.S. debt downgrade in August of 2011.

The lack of action to address the fiscal cliff before the election was understandable. However, after the election, we expect investors to be less tolerant of further delays. Investors should know relatively soon if Congress is serious about avoiding the fiscal cliff.

Article can be found at: https://www.wellsfargoadvisors.com/market-economy/economic-market-reports/weekly-economic-analysis.htm