Realtors see threat to rebounding housing market from fiscal cliff

By: Robert Guttersohn | C&G Newspapers | Published November 21, 2012

In the last two months, there have been signs of a housing rebound in parts of metro Detroit.

In some markets, house prices are rising, new-home construction is increasing and consumer confidence is high. At the same time, interest rates for mortgages continue to be at an all-time low. Kevin Higgins, a Realtor from Real Estate One in northern Macomb County, has seen house sales in his market appreciate up to 10 percent during the last year.

“That’s a good number,” he said. “When you take out the bubble years (about 15 percent appreciation each year), 5 to 10 percent are healthy numbers.”

Realtors in metro Detroit echoed Higgins’ analysis, seeing the trend continue throughout the next year. 

“I don’t think the housing market will do anything different over the next 12 to 14 months, as long as the economy continues to recover,” said Brian Powers, a Realtor from Keller Williams Macomb-St. Clair.

But the slight gain in the market, they warn, could be for naught if congressional gridlock causes the country to go over the so-called fiscal cliff and lets key legislation that encourages homeownership expire.

“Although we’ve made a very small recovery, this is going to reverse everything,” said Ronna Feldman from Max Broock Realtors in Bloomfield Hills.

The cliff is a collection of tax increases and federal budget cuts set to go into effect at the end of the year, unless Congress acts to block them.

The budget cuts — made automatic by Congress in 2011 to pressure itself into coming up with a bipartisan deficit-reducing plan before 2013 — and the tax increases would pull $800 billion out of the economy in 2013, according to Forbes Magazine. If Congress does not prevent both from happening, the Congressional Budget Office projects that the economy would contract in 2013, meaning another recession for the country.

The deadline being less than two months away has created an underlying sense of uncertainty among consumers.

“It’s an emotional recession and then it becomes a reality,” Feldman said. “We can feel the uncertainty in the market.”

One tax-relief program set to expire at the end of this year, which all of the Realtors identified as key to continued housing growth, is the Mortgage Forgiveness Debt Relief Act passed in 2007.

“I think that, from the federal level, (the debt-forgiveness act) will have the biggest impact on the housing market,” Feldman said.

It essentially encourages people to sell their home at a lower value, rather than foreclose.

If a homeowner short-sold their home before the act passed, the federal government would tax the amount of forgiven debt. For example, if a bank loaned someone $150,000 for a home, and it only resold for $100,000, the homeowner would be taxed for the $50,000 in forgiven debt.

“It was like one more kick in the gut to distressed homeowners,” Powers described.

When the act passed in 2007, it allowed homeowners who were under water on their mortgage — meaning they owed more to the bank than what the house was worth — to sell short without being taxed for the forgiven debt. It encouraged homeowners to sell, rather than leave their home behind and let it fall into foreclosure.

“It’s something they (the government) really need to get together and extend. It allows people to avoid foreclosure, and that’s good for everybody,” Powers said. “It is one of the few things the government has done to help the housing market.”

Throughout the last year, the housing market in metro Detroit has seen its best numbers since before the housing bubble.

“We’re looking at an upswing in the housing market,” Feldman said. “We’ve definitely hit the bottom and are on the way back up.”

But the market is still fragile. Real estate companies’ home inventories are low, partly because houses are being bought as soon as they hit the market, but also because banks are still holding onto millions of foreclosures in order to increase the values of the houses on the market, Feldman said. Therefore, the tax benefit is still needed, according to the experts.

Higgins said he can’t imagine lawmakers not extending the act.

“I would like to think that is going to get renewed,” he said. “That’s one where, if you think logically, it would make sense to be renewed. If they (homeowners) are forgiven on any amount of debt, they have a financial burden, so why would you tax them on money they don’t have?”

But then he admitted logic can sometimes be hard to find in Washington, D.C.