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).

Related article:

Buyer purchasing power falls slightly, remains high

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?