Corpania Ideas

CAVEAT! I'm an amateur philosopher and idea-generator. I am NOT an investment professional. Don't take any of my advice before consulting with an attorney and also a duly licensed authority on finance. Seriously, this my personal blog of random ideas only for entertainment purposes. Don't be an idiot.

Sunday, November 25, 2012

New Predictions: Fiscal Cliff Deal will Cap Deductions Thus Hurt Real Estate

After watching the "This Week with George Stephanopoulos" today (11/25/12) as well as my standard sources of news (Rachel Maddow, TYT, NPR and regular random samplings of FoxNews) it is becoming increasingly clear to me that the deal to avert the "Fiscal Cliff" will likely include a capping of tax deductions (especially including mortgage deductions).

If that first prediction is correct then my consequential second prediction is that Real Estate prices will continue to stagnate or may even fall again.

The reasoning is pretty straightforward (assuming mortgage deductions are indeed capped):

1) Owners of multiple properties (especially those who have rental properties) will be hit very hard by the capping of such tax deductions (because it is conceivable that there could be no such cap on one's primary residence). Such a substantial increase in taxes (by virtue of the fact that less rental revenue will be offset by these new, smaller deductions) will result in those owners taking home less profit which will result in marginally profitable rental properties becoming unprofitable. 

2) These newly unprofitable rental properties will encourage sales of those properties (especially for those owners who are highly leveraged).

3) This downward pressure on sale prices will be in effect for at least as long as those new tax policies (capping deductions) are in effect thus limiting price rebounds (perhaps more so than the upward pressure of slow to moderate economic growth in America).

4) Secondarily, those considering buying another house (especially as a rental property) will have substantially less incentive to do so. This reduction in profitability of rental properties (due to less deductions) will further depress prices because the sellers will have fewer & less-motivated buyers than they would have had under the current tax code.

CONCLUSION: Be very careful about buying a rental property until after the fiscal cliff deal is set (unless you're massively low-balling on the price - because, of course, if the property is cheap enough there may still be worthwhile profit to exploit).

BONUS PREDICTION: I suspect this new path (of capping deductions) will most personally hurt those making between $200k to $1mil per year who have a lot of property loans. But it will also make mansions (high end real estate) substantially less attractive because they will cost buyers/owners much more money to own (in the form of more taxes due to limited deductions) compared to the current system. This will likely reduce the amount of loans taken out to buy such properties going forward. This will probably place some significant downward pressure on high end real estate prices for the foreseeable future (IMHO).
CAVEAT: It is not clear to me if this downward pressure on high end real estate prices will overtake the upward pressure that results from the increasing income inequality dynamics (i.e. when the "rich get richer" there is necessarily a greater than average pressure to bid-up high end real estate compared to the rest of the real estate market).

SIDE NOTE: This all ties in to one of my grander theories that most lobbyists (and by extension virtually all non-progressive politicians) have the greatest incentives to protect the top "1/100th of the top 1%" and not actually the top "1%" (let alone the top 5%). A lobbyist (like Grover Norquist, who I truly believe has hurt America) doesn't primarily make money from the top 5% or even the top 1% - even if he most associates with people in those echelons. Instead he gets direct payments from hectomillionaires & billionaires and logically thus considers them to be his bosses. Consequently, policies that would benefit the the top 5% or 1% (like not capping deductions) are sacrificed in order to protect the hectomillionaires & billionaires (who would be most "hurt" by increases in tax rates increasing to 39.6% like they were under Clinton and like those tax policies that Obama specifically campaigned on - which is what the current GOP is most fiercely fighting against).

If those in the top 1% (and especially all those in the top 5%) were smart they'd recognize the danger of superpacs & lobbyists who primarily protect the hectomillionaires & billionaires. Without the superpacs & lobbyists, our elected officials would likely be more influenced by those with whom they most associated (i.e. those in the top 5%). This likely would result (IMHO) in more steeply progressive taxation that collects massively more from hectomillionaires & billionaires (like America did in the 1950s through the the 1960s). There would thus be a greater counter-balance against the insidious & as yet unmitigated increase in income inequality (which I have long preferred to refer to as "income extremity").

MOST IMPORTANTLY: This are just my amateur musings. I have no financial or legal bona fides. Be sure to consult with your financial services professional before making any investment decisions. Remember that just because my previous predictions have proven correct a high percentage of the time doesn't mean they all will. I could easily be wrong. We'll see.

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