So, we've all heard about the fiscal cliff and that it will be bad.  In a recent interview, Lawrence Yun of the National Association of Realtors, gave his opinion of what the impact of the fiscal cliff might be.

Sequestration, the mandatory cuts Congress passed because the Congress did NOT adopt the recommendations of the Super Committee on how to avoid a fiscal cliff, will be tripped at the first of 2013.  Sequestration mandates $100 billion in cuts for 8 years, mainly impacting defense.

Among the many aspects of the fiscal cliff are the following:

  • Payroll tax will increase to 6.2% from 4.2%, an increase in revenue of $110 billion
  • END emergency unemployment benefits, a reduction of $30 billion in spending
  • CUT Medicare reimbursement rates, a reduction of $15 billion in spending
  • a 3.8% surcharge for a limited number of high income individuals, increasing revenue by $20 billion
  • END Bush era tax cuts, an increase of $310 billion in revenue
  • END specific types of business tax expensing, an increase of $60 billion in revenue
  • CUT defense spending by $35 billion
  • CUT non-defense discretionary government spending by $35 billion

All the above theoretically result in a $615 billion reduction in the deficit.

Mr. Yun anticipates that without the fiscal cliff, there would be an increase in the Gross Domestic Product of 2%.  Should the fiscal cliff actually occur, Mr. Yun expects a decrease of 4% in GDP, which would throw the country back into recession.

For 2013, Mr. Yun also expects that without the fiscal cliff, there would be an increase of 2 million net new jobs.  If the fiscal cliff does happen, he anticipates a NET loss of 1-2 million jobs.

One particular source of revenue that Congress is looking at is the Mortgage Interest Deduction.  If completely eliminated, the MID can represent about $90 billion in new revenue, according to Mr. Yun.  Presently, only people with a mortgage can take advantage of the MID.  However, Mr. Yun stated that if the MID is reduced or eliminated, housing prices will be depressed, causing wealth across the board in the housing industry to disappear, thus reducing or eliminating the MID has a negative impact on every homeowner.

One last point from Mr. Yun is that if housing prices rise in the coming year, many homeowners currently "underwater" or owing more than the value of their homes, would see the price increase bring them to even or  above water on the mortgage to value.  This then results in fewer foreclosures.  On the other hand, if housing prices drop, "underwater" homeowners will continue to be "underwater" and there would be more foreclosures.  

In all previous recessions, the housing industry and all the peripheral industries from construction to building supplies, to flooring installers to electricians to roofers to appliance providers to lawn services to many, many more businesses have led the way out of economic hard times.

In short, it behooves not only all homeowners, but the nation's economy in general, for the leadership in Washington to find a solution to the impending fiscal cliff.