So now that the elections are over and President Obama has won a second term, the focus shifts to the fiscal cliff. What is this cliff exactly? And how steep is the fall? Well, pretty steep, if we fall. In essence, three things are set to happen:
The first is the expiration of tax cuts. Payroll tax cuts from last year would expire as would the Bush-era tax cuts, the end of certain tax cuts for businesses and the emergency unemployment benefits. The second is an actual increase in taxes from the Health Care Law. The third is automatic spending cuts agreed upon from the budget deal in 2011.
Ouch, a Triple Punch
Let’s look at what economists estimate to be the impact of this triple punch. The tax cut reversals would take out about $440B from the economy. The tax increases relate to the new health care law. There will be an increase in taxes for hospital insurance by about .9% and a surtax of about 3.8% on investment income. The automatic budget cuts are pretty steep and dramatic – they will affect over 1000 programs with pretty big hits to Medicare and defense. The savings would be around $100B.
So where does all of this leave us? Well, it takes about a $550B bite out of our economy and the deficit. The congressional budget office estimates that it will whack GDP by 4% or so and cost 2 million jobs plunging the country into a recession. If this scenario comes to pass, Greece and Spain are going to look like wild party and spend countries compared to us.
So what’s the impact of all of this on real estate? First of all, passive income whether it is in real estate or the market is going to be taxed at a higher rate. Dividends will take a big hit if that holiday expires. A depressed economy is going to dial back positive home ownership trends that we have seen in the recent months. There were about 1.1 M new households formed in the 12 months ending September. Most of these were renters. We expect this trend to continue especially if there is uncertainty in the employment market. This increased renter pool would be good for all who are buying Residential Rental investments. As long as you are buying the right property in the right area with the right manager. To get more information on how to buy right, register.