What stories brought the most interest from all sectors of the real estate community in 2005?

The devastation of Hurricane Katrina clearly was the leader in more than the real estate category. Thousands of residents losing their loved ones, homes, jobs and dreams became reality for one of the more popular areas of the country. Scores of Gulf Coast people continue to live in hotel rooms and trailers. The uncertainty of how, when, and where to rebuild will continue for countless months for many families. May the spirit of the Christmas season bring renewed hope to all hurricane victims.

Certainly rising interest rates made news this year. The prospect of higher home-loan payments began to slow sales–and investor speculation–in many markets. When monthly mortgage costs leap to levels that cannot be countered by higher rents, low-down payment landlords would rather walk away than sell for a loss.

Despite what you might have heard, the Federal Reserve’s 12 moves to lift rates did not cripple sales in many popular owner-occupied neighborhoods. That’s because consumers, spoiled by a terrific borrowing environment for the past three years, often jump down off the fence and buy when rates rise in an effort to catch rates before they move even higher. Home-loan rates, expected to rise considerably by the fourth quarter of 2005, finally did so; yet they were bouncing lower at the end of November than they were at the end of October.

A rather surprising subject that rocked the real estate world late in the year was the suggestion that the mortgage interest deduction on primary residences would be altered and reduced for most taxpayers itemizing their federal tax returns. The issue of tax reform was rumored a year ago but few analysts believed such a long-standing, seemingly untouchable subject could possibly be headed for the chopping block.

The mortgage-interest deduction, viewed as a primary incentive to home ownership, was put on the table recently by a commission appointed by President Bush. Also up for discussion is the elimination of state and local property taxes as income tax deductions.

Themortgage-interestdeduction is not a dollar-for-dollar tax deduction; instead, it reduces taxable income. What has been recently proposed is disallowing federal tax deductions for first and second mortgages and replacing those write-offs with a 15 percent credit on some mortgage amounts (the mortgage interest deduction is a combined $1.1 million on first and second homes). The 15 percent credit would only be for mortgages up to $359,650. Not only would interest on home-equity loans no longer be tax-deductible but also deductions for state and local property and income taxes would go out the window.

What tax benefits would come to homeowners to replace those lost by the mortgage interest deduction? The proposal includes eliminating the alternative minimum tax, adding $100,000 to the current $500,000 tax-free exclusion on home-sale profits ($250,000 for single persons) and lowering capital-gains tax rates.

Realtors, builders, appraisers, title insurers, inspectors, lenders–just about anybody associated with a home-loan deal–quickly came to the defense of the mortgage interest deduction. The most vocal group has been the one million-member National Association of Realtors–the largest trade association in the United States.

“In my opinion it’s terrible timing–it’s almost irresponsible,” said David Lereah, NAR’s chief economist. Lereah also said that if the proposals became part of a new tax plan, local markets would be negatively affected. “That would do severe damage to a lot of the local markets across the nation. We are looking at probably a 10 to 15 percent drop in home prices.”

John Burns, who heads John Burns Real Estate Consulting in Irvine, Calif., said politicians should learn from their mistakes when it comes to a person’s primary residence.

“A stable housing market is in the best interest of almost every household in the country,” Burns said. “In the past, it has been elected officials that have created booms and busts. Let’s encourage the elected officials to leave the housing market alone or, at a minimum, implement changes over a long period of time instead of the immediate ‘phase-in’ of radical changes that has occurred in the past.”

And finally, current and future retirees do not want a house built for old people. This past year, builders again heard the message loud and clear this year from their next biggest housing niche. Aging boomers and retirees want an easy living home that an Olympic athlete would also enjoy, and their preferences will vary greatly.

Who wants to dwell in old . . . especially when it’s time to usher in the new?

Need a warm topic for the cold season? Tom Kelly’s new book, “Cashing In on a Second Home in Mexico: How to Buy, Sell and Profit from Property South of the Border,” was co-written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on www.Amazon.com or get your signed copy at www.tomkelly.com.

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