Sequestration will affect real estate and housing markets

by Dan Krell

Housing and Sequestraion(Dan Krell © 2013) Remember the “Fiscal Cliff?” Well, after a two month hiatus, sequestration concerns are again entering (if not intrusively) the minds of those who may be affected. And, if you remain indifferent on the matter, you might consider the local economic effect from looming government budget cuts that may begin on March 1st.

On February 14th, HUD Secretary Shaun Donovan provided written testimony to the “Hearing before the Senate Committee on Appropriations on The Impacts of Sequestration” ( Secretary Donovan outlined what he described as the “harmful effects of Sequestration” to not only at-risk populations, but families, communities, and the economy at large, as he concluded, “…Sequestration is just such a self-inflicted wound that would have devastating effects on our economy and on people across the nation.”

As a result, HUD counseling would be limited. According to Secretary Donovan, about 75,000 families would not be able to receive the critical counseling services that include pre-purchase counseling, and foreclosure prevention counseling. According to the Secretary: “…This counseling is crucial for middle class and other families who have been harmed by the housing crisis from which we are still recovering, and are trying to prevent foreclosure, refinance their mortgages, avoid housing scams, and find quality, affordable housing. Studies show that housing counseling plays a crucial role in those 3 efforts. Distressed households who receive counseling are more likely to avoid foreclosure, while families who receive counseling before they purchase a home are less likely to become delinquent on their mortgages.”

FHA has been the workhorse to stabilize the housing market as well as providing the means for affordable home purchases. Those directly affected by sequestration would be home buyers and home owners who are applying for FHA mortgages; as well as those seeking assistance through HAMP and HAFA. In written testimony, Secretary Donovan stated that “…furloughs or other personnel actions may well be required to comply with cuts mandated by sequestration.” As a result, “…The public will suffer as the agency is simply less able to provide information and services in a wide range of areas, such as FHA mortgage insurance and sale of FHA-owned properties.”

Another concern is the possibility of a sharp increase in interest rates. Up until now, home buyers (and those refinancing) have had the benefit of historically low mortgage interest rates. Low mortgage interest rates are one of the reasons why home affordability is also at historic levels. A sharp rise in interest rates combined with FHA mortgage delays could shock the housing and real estate market. The result could be housing activity similar to what we experienced immediately after the financial crisis. Granted, the shock would probably not be as prolonged as what occurred in 2008-2009, but nonetheless significant.

In a region that has been relatively unaffected by unemployment and economic issues due to a strong government workforce, sequestration could essentially put a damper on the local housing recovery. Home buyer activity has already been affected, as those who are concerned about sequestration have either put their home purchase plans on hold, or have changed their housing plans altogether. And of course, over time, the changes to consumer behavior would trickle down to various sectors of the economy.

But don’t worry, although sequestration is set to begin March 1st, budget cuts won’t occur all at once. Unless Congress acts on the matter, you might not immediately feel its effects.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of February 18, 2013. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

Housing approaches the fiscal cliff

by Dan Krell
© 2012

Fiscal cliffMoving forward after the election, there are a number of events and possible legislation that could impact the real estate industry. The most imminent is the “fiscal cliff.”

The “fiscal cliff” is the term that describes the expected economic outcome of the automatic budget cuts (sequestration). Sequestration was part of a budget deal that was passed as the bipartisan Budget Control Act of 2011. Even though it is described as an economy falling off a cliff, some say it is more apt to an economy hitting a brick wall; because the sequestration will make it very difficult for the economy to expand. Others are not as pessimistic about the fiscal cliff; some describe the “cliff” as a gentle slope that may present some impediments to the economy that are not insurmountable.

Regardless of the description, there is a consensus that there will be some economic obstacles. There is an economic truth that the housing market benefits from a thriving economy, as well as suffering when the economy slows.

The Congressional Budget Office has provided warnings that a “fiscal cliff” could cause a recession in 2013 and possibly increase unemployment significantly. As we already know, a recession combined with increases in unemployment will not be good for the housing market. In a Florida Realtors® 2010 study conducted to determine causes of foreclosure in Florida, determined that there is a correlation between unemployment and foreclosure – citing a combination of increased cost of living, unemployment or decreased pay, and other factors.

To address budget deficits and avoid a fiscal cliff, various committees have convened and provided recommendations proposal for improve the budgetary process that included a number of recommendations to lower the budget deficit. One common thread in addressing budget deficits is to either eliminate or further restrict the mortgage interest deduction.

The origination of the mortgage interest deduction is not as extraordinary as you’d expect; however the fact that it has remained through tax reforms during the Reagan administration has been described as rather “remarkable.”

Fiscal cliffThe mortgage interest deduction is often described as a subsidy for the housing industry to encourage participation in market (similar to the first time homebuyer tax credits offered several years ago). Much like social security, it is a political hot potato that elected officials are hesitant to address. Some have argued for many years that the mortgage interest deduction should be eliminated since because they assert the subsidy artificially inflates home prices.

However, a National Association of Realtors® (NAR) December 1, 2010 press release, stated “The tax deductibility of interest paid on mortgages is a powerful incentive for home ownership and has been one of the simplest provisions in the federal tax code for more than 80 years…” The release cited a survey that indicated that the deduction was extremely important or very important to three-fourths of the 3,000 homeowners and renters surveyed (

Several years ago, the Congressional Budget Office recommended the elimination of the mortgage interest deduction. Additionally, the bipartisan National Commission on Fiscal Responsibility and Reform (more commonly known as the Simpson Bowles Commission) provided recommendations to reducing the mortgage interest deduction benefit from the current $1,000,000 limit to a cap of $500,000.

A resolution to the fiscal cliff may be reached before year’s end; the housing recovery depends on it.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of November 12, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.