Now with the election behind us, it is time to look to the end of this year and the year beyond.
As we prepare for 2013 one of the big issues in the Sacramento housing market remains distressed properties and if Congress will extend the Mortgage Debt Forgiveness Tax Relief law. This is this act which provides a tax exemption for forgiven debt related to the short sale of homes. The act and the exemption are set to expire at the end of the year and if not extended will virtually remove short sale as an option for homeowners who must sell a home with a value less than the mortgage balance. If the law is allowed to expire, homeowners who negotiate a short sale or lose their homes through foreclosure would have to pay federal taxes on the amount forgiven by their lender.
The NATIONAL ASSOCIATION OF REALTORS(r) has issued a nationwide Call-for-Action, urging members to contact their Members of Congress in support of extending the current Mortgage Debt Forgiveness Tax Relief law. Despite some positive signs of recovery, our nation’s real estate market is still fragile. Over a quarter of all transactions still involve distressed properties. As part of this call I am urging you to contact your representatives and ask them to support an extension of the act.
As we move into 2013 the California housing market will continue to recover. The California Association of Realtors has forecast increased sales for the third consecutive year and the median price to rise for the second straight year. The C.A.R. forecast sees sales gaining 1.3 percent next year to reach 530,000 units, up from the projected 2012 sales figure of 523,300 homes sold. Sales in 2012 will be up 5.1 percent from the 497,900 existing, single-family homes sold in 2011.
C.A.R.’s forecasts the average for 30-year fixed mortgage interest rates will edge up to 4 percent after six consecutive years of declines, but will still remain historically low.
The statewide median home price is forecast to increase a moderate 5.7 percent to $335,000 in 2013. Following a decrease in 2011, the California median home price will climb a projected 10.9 percent in 2012 to $317,000.
The Impact of the 2012 Elections on the Real Estate Industry
According to the Building Owners and Managers Association (BOMA), the office building industry contributes over $200 billion a year to the US. economy. BOMA estimates that office building operations alone support more than three million jobs. The nation’s $2.9 trillion real estate sector had much riding on the elections, with President Obama and challenger Mitt Romney each embracing differing policies with potentially significant impact on the real estate industry. While election cycle formulations often fail to secure enthusiastic execution after re-election, now that the people have given President Obama another term in office, we can begin to assess the policies he may espouse in his second term that could impact the real estate industry. In New Jersey and much of the country, the commercial real estate industry has been hampered by a lack of job growth, tight financial markets and high vacancy rates.
In New Jersey, the first decade of this century was a time of sub-optimal employment growth, with the state ending the decade with almost 100,000 fewer private sector jobs than when it started. The state’s lackluster economic performance over the past twelve years, has contributed to a stagnant real estate market. In the period from 2002 to 2012 the state experienced either negligible positive absorption or negative absorption of office space. And vacancy rates for all classes of office space have remained stuck within a high range of between 17% and 21%. Similarly, from 2000 through the present, Direct Weighted Average Gross Asking Rental Rates for all classes of office product has remained within a range of $21 and $31 a square foot.
An issue of great interest to the real estate industry is the tax treatment of capital gains. The current capital gains tax rate is 15 percent. President Obama has expressed support for the “Buffett rule”, which would assess a 30 percent tax on capital gains for people making more than $1 million per year. Governor Romney’s position was to maintain the 15% rate with complete exemptions on capital gains, dividends and interest income given to those making less than $200,000 annually.Another policy initiative that could impact commercial real estate involves financial regulation. President Obama was a champion of the Dodd-Frank Act and considers it a cornerstone of his first term. It imposes tighter regulatory controls and potentially increased costs on banks, as well as more oversight and supervision for the nation’s largest institutions.
Governor Romney had vowed to repeal Dodd-Frank believing that it unduly burdened the economy. Instead, he advocated higher capital requirements and leverage limitations to promote stability in the financial markets. Commercial real estate loans differ from their residential-loan counterparts. With residential loans, the debt is amortized over a set period of time – usually 20 or 30 years. Commercial mortgages are usually underwritten for five, seven or 10 years (five years being most common), amortized as if they were a longer term loan with big “balloon” payments due at the end. At that point, the property owner usually refinances the debt. A borrower’s inability to refinance could force it to default.
Financial regulation under Dodd-Frank may impact the $300 billion in commercial real estate loans being re-financed in 2012 as well as the $2.4 trillion maturing by 2018.While issues impacting residential real estate may seem unrelated to the commercial real estate industry, multi-family housing is an important sector for real estate investment groups. Whether the federal tax deduction for mortgage interest will be changed or eliminated could have a significant impact on the real estate industry. Currently, homeowners may deduct the interest on mortgage loans for primary and secondary residences up to $1 million of mortgage debt. Interest on home equity loans up to $100,000 may also be deducted. The mortgage interest deduction provides about $90 billion in tax savings to homeowners each year and has enabled homeownership in the U.S. since 1913. President Obama has expressed an interest in limiting or eliminating this deduction.
Election Impacts Commercial Property Prospects
Elections matter—and the recent Presidential and Congressional elections made a bigger difference than most.
That’s because over the next few months, Congress and the President are going to negotiate over avoiding the fiscal cliff—a massive series of cuts to social programs and defense spending—plus the expiration of the Bush tax cuts. The fiscal cliff will come into effect in January unless a new agreement is reached over how to cut $4 trillion from the U.S. deficit by other means.
Commercial real estate analysts have written up a storm of analysis in the wake of the election, calling winners and losers based on the results and the promises that both candidates made during the election.
However the biggest winner or loser will be the economy overall—regardless of what Congress and the President decide to do, the economy is likely to benefit in the short term if they can come to a deal on the deficit that avoids the fiscal cliff, and economists say the U.S. economy is likely to suffer if they cannot.
Uncertainty is still a giant weight on our economic recovery—companies still hesitate to invest because of a few giant unresolved questions, starting with the federal budget. “To get past this lukewarm recovery, we need some direction from Washington,” says Benjamin Breslau, director of Americas research for Jones Lang LaSalle. “How do you make moves on capital until you understand the rules of the game?”
Breslau predicts slow growth next year for the economy, though “growth could accelerate in later 2013 and 2014,” depending on the negotiations in Washington. “We are not predicting a recession in 2013… We think there is some pent up demand from corporations and consumers,” he says.
Deficit negotiations now underway could resolve one of the last big open questions on U.S. policy that weigh on the economy. Several others have already been answered. The “Dodd-Frank Wall Street Reform and Consumer Protection Act” is going to be implemented, for example. “The Affordable Care Act” will also go into effect. A Romney administration had promised to repeal and replace both of these laws.