This week we witnessed one of the most hotly contested mid term
elections in American history.
It was an election filled with vicious personal attacks, ultra negative campaign ads, and accusations of voting fraud.
In other words, just another day in American politics.
When it was over, the Republicans had carved out substantial gains in the House of Representatives, and somewhat pared down the Democrats' margin in the Senate.
Several big name incumbents, such as 18 year veteran Russ Feingold (D-Wisconsin), were sent packing by voters who loudly expressed their discontent about the recent performance of politicians from both political parties.
Yet curiously, Nevada, the state with both the highest levels of foreclosures and unemployment in the country, chose to re-elect Senate Majority leader, Harry Reid.
Perhaps the Republicans did not run the strongest candidate, but the result of that election, given Nevada's enhanced problems and the other election results from across America, was truly an enigma.
The question now is -- how will the results of the 2010 election impact the economy, and in particular, the real estate market?
There was a lot of talk about foreclosures in this campaign, but few real solutions were provided for the housing crisis, now in its third year.
This much is certain: Stability of real estate values will only come about with an improvement in the employment rate.
While foreign investors with cash continue to snap up cheap foreclosures in areas like South Florida, average Joe and Sally in Bowling Green, Kentucky are still unemployed and unable to save up a down payment, or even qualify for their dream home.
If you don't have a down payment, or if your credit is shot from not being able to pay your bills, historically low interest rates or mid 1990's home prices still mean nothing to you.
So it's really all about job creation now.
There are two possible scenarios that have been created by this election. The first is that a Republican House and Democratic Senate find themselves in perpetual stalemate, unable to pass much legislation to provide confidence to the business world to begin hiring again.
Major corporations have been stockpiling cash, but are waiting to see whether new taxes or new health care costs will make it difficult to hire more workers.
The stalemate scenario has been enhanced by the election of Tea Party candidates and other conservatives who have made it clear they don't intend to "get along and go along" like the moderate Republicans and Democrats whom they ousted.
In other words, there could be even more polarization of views between the two parties than before, which will make it far more difficult to pass legislation on issues such as tax cuts or spending.
The second (and more optimistic) scenario is that politicians who fear for their jobs in 2012 will decide that it's better to work together with their political foes than to remain steadfast, do nothing, and have to explain that to voters in two years.
If the two parties can work together to help businesses create more jobs, then Average Joe and Sally can once more find work, begin to pay off debts or save, and eventually buy themselves a very affordable home.
Another consideration is the health care bill, and whether or not it will be repealed, modified, or just de-funded by the new Congress. One of the lesser known provisions of the bill was a 3.8% tax on real estate investment income above the capital gains threshold, starting in 2013.
There has been much confusion over this new tax, with some people claiming that all home sellers will have to pay 3.8% on every dollar of profit, but that is not correct. Here is the actual rule:
Code section 1411 (of the health care legislation) imposes a 3.8% tax on the lesser of "net investment income", or the excess of modified adjusted gross income over a "threshold amount" ($250,000 for married couples filing jointly, $125,000 for married couples filing single returns, and $200,000 for all others).
Clear as mud, right?
In Planet Earth English, if you earn more than the profit figures listed above for each type of tax filer, and sell a primary residence with a profit greater than currently allowed exemptions ($500,000 for married filing jointly, $250,000 for single filers), you will be subject to a 3.8% tax on the profit above those numbers. For example:
Tom and Mary, a married couple whose adjusted gross income is more than $250,000, and who file taxes jointly, sell their home. The sale makes them a $600,000 profit from their "cost basis" (original cost of the house, plus major improvements made).
As a result of the Health care bill, they will now pay 3.8% tax on the $100,000 amount above the $500,000 profit limit that a married couple can make tax free. So their taxable amount would be $3800.
Other Possible Election Results
The Republican gains may put an end to any further plans for a housing stimulus, as we saw with last April's first time home buyer tax credit.
The loan modification programs enacted over the past two years have produced results ranging from mediocre to poor. They are not likely to continue, or we could see modifications in those programs.
But perhaps the most important factor which will help determine the future of the real estate market is the ongoing foreclosure crisis that shows no sign of slowing down.
We are now faced with some 11 million foreclosures nationwide that are still sitting in the pipelines, with millions more to follow, according to many economists.
Beyond that, there is an enormous and complex issue that needs to be resolved, on whether a significant number of foreclosures were improperly or even illegally performed.
The answer to that question may have to come from both the White House and the Congress, in conjunction with lenders, homeowners, and the courts. Whether or not they can all work together will have a huge impact on the resolution of the issue, and how it affects real estate values.
Banks continue to resist efforts to short sale many homes in default, opting to foreclose on them instead. Perhaps the new members coming into Washington can figure out a way to influence the banks to improve on that, so as to slow down the number of foreclosures.
So to sum it all up, what we have now is a high degree of uncertainty. And when investors and consumers feel uncertain about the future, the tendency is to sit on one's hands and do nothing.
And while a do-nothing Congress is sometimes good for a strong economy, another two years of inactivity or demoralizing political fighting in the current environment could be disastrous for the financial markets.
See you next week!
It was an election filled with vicious personal attacks, ultra negative campaign ads, and accusations of voting fraud.
In other words, just another day in American politics.
When it was over, the Republicans had carved out substantial gains in the House of Representatives, and somewhat pared down the Democrats' margin in the Senate.
Several big name incumbents, such as 18 year veteran Russ Feingold (D-Wisconsin), were sent packing by voters who loudly expressed their discontent about the recent performance of politicians from both political parties.
Yet curiously, Nevada, the state with both the highest levels of foreclosures and unemployment in the country, chose to re-elect Senate Majority leader, Harry Reid.
Perhaps the Republicans did not run the strongest candidate, but the result of that election, given Nevada's enhanced problems and the other election results from across America, was truly an enigma.
The question now is -- how will the results of the 2010 election impact the economy, and in particular, the real estate market?
There was a lot of talk about foreclosures in this campaign, but few real solutions were provided for the housing crisis, now in its third year.
This much is certain: Stability of real estate values will only come about with an improvement in the employment rate.
While foreign investors with cash continue to snap up cheap foreclosures in areas like South Florida, average Joe and Sally in Bowling Green, Kentucky are still unemployed and unable to save up a down payment, or even qualify for their dream home.
If you don't have a down payment, or if your credit is shot from not being able to pay your bills, historically low interest rates or mid 1990's home prices still mean nothing to you.
So it's really all about job creation now.
There are two possible scenarios that have been created by this election. The first is that a Republican House and Democratic Senate find themselves in perpetual stalemate, unable to pass much legislation to provide confidence to the business world to begin hiring again.
Major corporations have been stockpiling cash, but are waiting to see whether new taxes or new health care costs will make it difficult to hire more workers.
The stalemate scenario has been enhanced by the election of Tea Party candidates and other conservatives who have made it clear they don't intend to "get along and go along" like the moderate Republicans and Democrats whom they ousted.
In other words, there could be even more polarization of views between the two parties than before, which will make it far more difficult to pass legislation on issues such as tax cuts or spending.
The second (and more optimistic) scenario is that politicians who fear for their jobs in 2012 will decide that it's better to work together with their political foes than to remain steadfast, do nothing, and have to explain that to voters in two years.
If the two parties can work together to help businesses create more jobs, then Average Joe and Sally can once more find work, begin to pay off debts or save, and eventually buy themselves a very affordable home.
Another consideration is the health care bill, and whether or not it will be repealed, modified, or just de-funded by the new Congress. One of the lesser known provisions of the bill was a 3.8% tax on real estate investment income above the capital gains threshold, starting in 2013.
There has been much confusion over this new tax, with some people claiming that all home sellers will have to pay 3.8% on every dollar of profit, but that is not correct. Here is the actual rule:
Code section 1411 (of the health care legislation) imposes a 3.8% tax on the lesser of "net investment income", or the excess of modified adjusted gross income over a "threshold amount" ($250,000 for married couples filing jointly, $125,000 for married couples filing single returns, and $200,000 for all others).
Clear as mud, right?
In Planet Earth English, if you earn more than the profit figures listed above for each type of tax filer, and sell a primary residence with a profit greater than currently allowed exemptions ($500,000 for married filing jointly, $250,000 for single filers), you will be subject to a 3.8% tax on the profit above those numbers. For example:
Tom and Mary, a married couple whose adjusted gross income is more than $250,000, and who file taxes jointly, sell their home. The sale makes them a $600,000 profit from their "cost basis" (original cost of the house, plus major improvements made).
As a result of the Health care bill, they will now pay 3.8% tax on the $100,000 amount above the $500,000 profit limit that a married couple can make tax free. So their taxable amount would be $3800.
Other Possible Election Results
The Republican gains may put an end to any further plans for a housing stimulus, as we saw with last April's first time home buyer tax credit.
The loan modification programs enacted over the past two years have produced results ranging from mediocre to poor. They are not likely to continue, or we could see modifications in those programs.
But perhaps the most important factor which will help determine the future of the real estate market is the ongoing foreclosure crisis that shows no sign of slowing down.
We are now faced with some 11 million foreclosures nationwide that are still sitting in the pipelines, with millions more to follow, according to many economists.
Beyond that, there is an enormous and complex issue that needs to be resolved, on whether a significant number of foreclosures were improperly or even illegally performed.
The answer to that question may have to come from both the White House and the Congress, in conjunction with lenders, homeowners, and the courts. Whether or not they can all work together will have a huge impact on the resolution of the issue, and how it affects real estate values.
Banks continue to resist efforts to short sale many homes in default, opting to foreclose on them instead. Perhaps the new members coming into Washington can figure out a way to influence the banks to improve on that, so as to slow down the number of foreclosures.
So to sum it all up, what we have now is a high degree of uncertainty. And when investors and consumers feel uncertain about the future, the tendency is to sit on one's hands and do nothing.
And while a do-nothing Congress is sometimes good for a strong economy, another two years of inactivity or demoralizing political fighting in the current environment could be disastrous for the financial markets.
See you next week!
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