One of the key principles of King Solomon’s advice to the one he addresses as his son in his Book of Proverbs is to seek wise counsel to avoid making hasty and imprudent decisions. Although the monarch himself made decisions unilaterally, there’s considerable evidence that he sought the advise of trusted counsel too. As the year draws to a close without a resolution to the budgetary crisis now known as the “fiscal cliff,” lawmakers worry about the implications of falling off the cliff into a ravine filled with tax hikes and severe cuts to essential programs. And with partisan proposals floated and rejected, nervous consumers and investors are seeking wise counsel, wondering what to expect at year’s end.
Financial experts see a few possible outcomes for the impasse, all of which have implications for the housing market and income property investing. The “fiscal cliff” means higher taxes and deep cuts in a variety of government-sponsored programs and services ranging from the defense industry to unemployment benefits. If not resolved, the budget crisis has an impact on the recovering housing industry as a whole, and investors in particular. According to economists, possible outcomes include no resolution at all, a resolution along the lines of either a Democrat or Republican sponsored plan, or a patchwork solution that combines elements of both.
If the year ends with no resolution, the housing market can expect potentially severe consequences. According to a new article posted by the Investing Architect, cuts in defense spending means cuts in personnel on military installations and defense-related corporations across the country. This could mean that housing demand may decline in those areas, driving home prices down. Not only that, higher taxes mean less available income, causing potential homebuyers to reconsider purchasing.
A Democrat sponsored solution would impose higher taxes on the upper tiers of income earners but would leave the mortgage interest deduction untouched. While this move might limit the amounts of money those higher income earners have available for investments, it could also increase the value of real estate as a safe, tax-sheltered investment.
The Republican plan resolves the fiscal cliff not by raising taxes but by closing tax loopholes and eliminating deductions. One of those expected to get the axe is the mortgage interest deduction, a key benefit for mortgage holders, both homeowners and investors. In that event, opponents say, property values would immediately decline since the mortgage interest deduction is viewed as an asset of the investment. The loss of this deduction could potentially even affect the decision to buy property, tipping the scales toward renting.
The clock is ticking on a full resolution in either of these directions. And most pundits don’t rule out a short-term patchwork solution drawing from both proposals. But with pressure to keep the mortgage interest deduction and preserve key government sponsored services and benefits such as long-term unemployment, higher taxes coupled with some cuts seem likely. Though no crystal ball is completely clear, investors applying Jason Hartman’s strategies to increase wealth through income property may want to pay close attention to the cliff – and seek the wise counsel that can prevent a fall into the ravine.
The Solomon Success Team