Whether you are thrilled and overjoyed at the results — or wearing sackcloth and rending your hair — the results of this month’s elections were, shall we say, sobering for the Republican party.
Not only did President Obama win re-election, but the Democrats strengthened their hold on the Senate, in a political environment that nearly everybody thought was disadvantageous to Democrats. An election that most talking heads thought would be razor-thin turned out to be as close a contest as Oregon vs. USC.
Since you’re reading this on Inman, your primary concern is what the election portends for real estate.
Fortunately for us, Lawrence Yun, the chief economist for the National Association of Realtors, fielded some great questions on this very topic from NAR’s director of digital engagement, Nobu Hata. Unfortunately for us, Dr. Yun’s answers seem somewhat contradictory and therefore require further bloviatings from op/ed columnists such as yours truly.
Words of wisdom
First, Yun states that the housing market is recovering at a decent pace, and that industry revenues should be about 15 percent higher going forward. Sweet!
But Yun also sounds some warnings about pullbacks in both government spending and the piling up of student debt.
Again on a positive note, Yun notes that some 4.5 million jobs have been created in the past three years. But the pace of job growth has been slow, and the fall in unemployment rate is due to people simply leaving the labor force. So ultimately, we’re just treading water.
Yun then speaks specifically about the election results, and says that NAR’s main concern is to prevent legislation harmful to housing and promote legislation helpful to housing.
I don’t know about you, but… that interview leaves me even more unsettled. Maybe I was hoping for a lot more Hopium, but I’m not getting a lot of warm and fuzzies from Dr. Yun’s words.
That fiscal cliff thingy
Let’s begin with the single biggest change in the political scene after the election: the Republican House prepares to cave.
The New York Times reported that Speaker John Boehner, who immediately after the election said he would accept "new revenues under the right circumstances," is whipping the House into compliance. Republicans still control the House and will staunchly oppose tax rate increases, but Boehner warned members of his party that they’ll have to avoid the nasty showdowns of the last two years — implying that there’s room for compromise on raising revenue by closing tax loopholes.
With the "fiscal cliff" looming by the end of the year, everyone and his grandmother knows that something must be done. What might that be?
Clearly, taxes on the rich are going up. In his first post-election speech, President Obama made that clear.
Although Obama didn’t mention an increase in "tax rates," the White House later made clear that the president will veto any bill that extends the current tax rates for those earning more than $250,000.
So taxes are going up for the wealthy. But that would bring in only about $82 billion a year. Since the 2012 deficit was $1.1 trillion, the boys and girls in D.C. are going to have to find more money from somewhere.
Enter the mortgage interest deduction.
Speaker Boehner has been repeating the mantra of "closing loopholes and deductions" instead of raising tax rates. What are these "loopholes and deductions"?
According to the Joint Committee on Taxation (via the Washington Post), the top five "tax expenditures" (meaning, taxes not collected, which equals an expenditure in D.C.-speak) are:
- Exclusion for employer-provided health-care – 13 percent
- Home mortgage interest deduction – 9 percent
- Preferential rates for dividends and capital gains – 8 percent
- Exclusion of Medicare benefits – 7 percent
- Net exclusion of defined benefit pension contributions/earnings – 6 percent
At 9 percent, the mortgage interest deduction amounts to some $80 billion a year in lost revenues, which is about the same amount of money that the Obama administration wants to raise by taxing the wealthy.
Since there is a greater chance that the Jets will win the Superbowl this year than there is of the federales making people pay incomes taxes on healthcare benefits provided by employers, or making seniors pay taxes on Medicare benefits, it’s probably time to kiss the mortgage interest deduction — at least as we know it today — goodbye.
That jobs thing
Yun also laments the state of the employment picture, suggesting that we’re just treading water.
Well, we may not even be treading water anymore. As noted by TheBlaze.com, the following companies announced layoffs and office/plant closings within 48 hours of the election:
Westinghouse, Research in Motion Ltd., Lightyear Network Solutions, Providence Journal, Hawker Beechcraft, Boeing (30 percent of their management – gone), CVPH Medical Center, U.S. Cellular, Momentive Performance Materials, Rocketdyne, Brake Parts, Vestas Wind Systems, Husqvarna, Center for Hospice New York, Bristol Meyers, OCE North America, Darden Restaurants, United Blood Services, Welch Allyn, Dana Holding Corp., Stryker, Boston Scientific, Medtronic, Smith & Nephew, Abbott Labs, Covidien, Kinetic Concepts, St. Jude Medical, Hill Rom, Caterpillar, Albrecht Sentry Foods, Target, Millennium Academy, KMart, The Andover Gift Shop, Grand Union Family Markets, Movie Scene, TE Connectivity (closing its Greensboro plant with 620 layoffs expected), Fresh Market, AGC Glass North America, The Roses, Meanders Kitchen, Harley-Davidson, Townsend Booksellers.
And as you may have heard, Applebees and Papa Johns were reportedly facing boycotts for their stances on job cuts.
Hmm. Well, here’s to hoping for the best, that all of these are just temporary blips on the forward march to job growth and prosperity!
Real estate recovery
All is not gloom and doom, however. In the short-term, as Dr. Yun said, housing market is likely to continue its recovery, at least in terms of price if not transactions, since low inventory is plaguing most markets. He’s projecting increased revenues of 15 percent for the industry. I think it’s likely to be quite a bit higher at least for the next several months.
Why? If the economic picture is gloomy at best, why would real estate recover?
In October, Bill Gross of PIMCO, the world’s largest bond fund, wrote in an Investment Outlook:
"How can the U.S. not be considered the first destination of global capital in search of safe (although historically low) returns? Easy answer: It will not be if we continue down the current road and don’t address our ‘fiscal gap.’ IF we continue to close our eyes to existing 8 percent of GDP deficits, which when including Social Security, Medicaid and Medicare liabilities compose an average estimated 11 percent annual ‘fiscal gap,’ then we will begin to resemble Greece before the turn of the next decade. Unless we begin to close this gap, then the inevitable result will be that our debt/GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow and the dollar would inevitably decline. Bonds would be burned to a crisp and stocks would certainly be singed; only gold and real assets would thrive within the ‘Ring of Fire.’ "
"Only gold and real assets would thrive within the ‘Ring of Fire.’ " Hooray for real estate!
Since raising taxes on the wealthy and eliminating the mortgage interest deduction would take our deficit from $1.1 trillion or so to only about $940 billion or so, I’m guessing that dollar devaluation will continue and that investors and savvy consumers know it.
Demand for real assets, like a house or an apartment building, will not only continue to be strong, but I suspect will rise over the next several months. Anyone who’s still got enough cash for a down payment should immediately buy a house on as long-term a fixed-rate mortgage he can get, since he’ll be repaying the loan with devalued dollars and house prices have nowhere to go but up, in dollar terms (though I suspect they will actually fall in real terms, if denominated in gold, for example).
So, expect a great fourth quarter, and maybe even a great first half of 2013, depending on what comes out of Washington D.C. over the next few weeks. Fortunately, NAR is pretty good at keeping on top of what’s going down in policyland with blogs and newsletters and Calls to Action and whatnot. Unfortunately, you all are gonna have to actually give a damn and pay attention to those things.
Such is the price of success going forward.
It simply cannot be debated now, if it was ever debatable, that Washington D.C. will be far more important for your business success or failure than San Francisco or Seattle are. Invest your time and money accordingly.