first tuesday insight
Changes to the tax code for 2013 earnings largely left real estate untouched. The mortgage interest tax deduction (MID) is still safe and sound, just as sacred as ever. The Mortgage Forgiveness Debt Relief Act (Debt Relief Act) was extended for another year, ensuring short sales will continue at pace.
Although income tax breaks were extended for the middle class, the payroll tax break was allowed to expire. The payroll tax increased by two percentage points for middle income earners in 2013. This increase has noticeably diminished the take-home pay of approximately 77% of American households.
Many first tuesday readers believe that this will negatively affect home sales volume in 2013. We disagree.
While consumer spending may suffer, buyer purchasing power will remain strong through 2013. Buyer purchasing power is determined by interest rates and a buyer’s gross income, which obviously has not been affected by the increased payroll tax. The buyer purchasing power is tracked monthly by first tuesday’s Buyer Purchasing Power Index (BPI).
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In fact, we propose this change to the tax code may even increase home sales volume! The cost of renting relative to buying is already extremely high due to excess demand for rentals. Rents are not linked to interest rates, but rather directly to incomes. Since take-home pay has diminished under the new tax code, rents have automatically increased relative to earnings. In other words, renting just got more expensive. This may prove to be the tipping point toward homeownership in 2013!
Re: “2013 tax landscape: a boon to California real estate?”
Vince L should feel fortunate that he is in a tiny minority with a six-figure income and can afford all his toys and golfing, but far and away many former homeowners are now renting because the recession/depression tore their houses from underneath them. Well, not completely. Too many of them fell victim to the human frailty of greed back in 2005-2007. They really believed that the house they bought would never go down in value. Hence, their credit and income went down the tubes and they are now renting hoping to be able to buy a home once again one day.
Ahh, the ignorance of josefb is glaring. Most (?) renters have bad credit and no money and that’s why they don’t buy a house. What an ignorant statement, how much of this type of ignorance do you share with your information-deprived clients? I make 6 figs a year and decided long ago to not buy a house for any number of reasons – would rather golf on weekends than mow the lawn, would rather hang out at the beach than clean the gutters, would like to be able to pick up and move to an opportunity than always have to worry about whether or not I’ll be able to sell my house. And finally, by not buying a home I’m not likely to have to give business to any agents or brokers like josefb.
Speaking as a tax preparer in California, I can’t think of any changes in the tax code that would affect home buyers, compared to the situation last year. The analysis above is correct. If the reset of payroll taxes to the pre-2011 rates is an issue for prospective purchasers, I would suggest they are cutting things a bit fine in their quest for the American dream – a situation which promises only to generate more of the problems we are currently working out.
I doubt if renters will rush out to purchase. Most of the renters do not have the money for a down payment on a house and most do not have good credit. Again, I emphasize most, not all.