Weekly Observation for February 28, 2009
February 28th, 2009We were teased this week with over sixty degree weather followed by Mother Nature reminding us it’s still winter. If the local housing market could affect the temperature it would be sunny and hot today. Local Realtors posted back to back weeks with sales pending exceeding ninety for the first time since the last two weeks in August, and at the same time ended a sixteen consecutive monthly decline in year over year sales pending.
This means March will probably see an increase in closed home sales. This is important because there were only two months in 2008 that posted year over year gains. The momentum has switched to the positive side which is welcome news to struggling home sellers. The big question is; how long will it last?
That’s the good news this week, now the troubling news for real estate markets across the country. The Obama administration has announced their tax increase promised during the campaign on the quote ‘wealthy’ earning over $250,000 annually. The increase of 4.6% in Federal income taxes is minor compared to the elimination or capping of the mortgage interest, charitable contribution, and state income tax deductions. This proposal has sent shock waves across the nation in the housing market. Especially the upper bracket market, and for home builders.
The nations leading Realtor who specializes in upper bracket home sales predicts a collapse in this segment of the market. Big income clients that make generous donations to charity will have to pull back on their giving, and many will sell their homes because they won’t be able to afford the payments if the mortgage interest deduction is eliminated or capped.
Please don’t confuse the wealthy with families that earn over $250,000 a year. People like Bill Gates and Warren Buffet are wealthy, and have billions in the bank. They don’t pay income taxes, they pay a flat tax. They earn profits from their companies which is taxed as capital gains, which will increase from 15% to 20%. Being able to deduct state income taxes probably won’t hurt them, and it is doubtful they have any mortgages, and even if they do, if the tax deduction is no longer available they’ll just pay off the loan.
The quote ‘wealthy’ earning over $250,000 a year are small business owners and physicians. They will have to pay the income tax of 39.6%, social security tax, medicare tax, and state tax which totals 61.1%, while the Buffets and Gates of the economy pay a flat 20%. For this class of producer this will mean an increase in federal taxes of tens of thousands of dollars annually. For physicians it means a serious pull back in spending, including housing, while to the small business owner it means the cost of doing business just went up, and cuts will have to be made, especially during a recession.
This means jobs because that is a small businesses biggest expense. The bad news is if these businesses lay off people, under the stimulus plan they’ll have to pick up the 35% cost of the Cobra health insurance premium for the laid off worker, taxpayers are picking up the other 65%. This will add yet another cost to the small business owner. Due to the stimulus plan the small business owner will have to lay off two people instead of one to cover higher taxes and cobra payments. Some stimulus eh?
According to the most recent data from the U.S. Census Bureau, firms with less than 20 employees account for over 90% of all American businesses and are responsible for more than 97% of all new jobs. These 26 million small businesses also employ over 50% of all private sector workers; according to Rueters as reported on February 18, 2009.
The majority of small businesses are S corporations that don’t pay federal corporate taxes, the company’s profit is passed through as individual income. Here’s the impact of the new tax proposal upon a small business. For our example this is a small business that earned $350,000 that passed through as income to the owner who pays $24,000 in mortgage interest a year, and donates $15,000 to charity. With the proposed changes in rate and deductions this small business owner will see their taxes increase by approximately $24,100 a year, not including the COBRA costs.
These proposed tax increases and deduction changes will further weaken the housing market across the nation at a time when we need the housing market to stabilize. This is a policy that will undoubtedly cause more harm than good in the economy, and should be reconsidered. Having already passed the house of representatives, we can only hope these proposals would be changed in the Senate. If not housing will suffer, and at a time of greatest need, charitable organizations will suffer.
This tax increase will weaken the upper bracket home market locally at a time that segment of the market has been soft. For example there are 245 homes listed for sale $250,000 and higher. Other markets would think $250,000 as laughable as the beginning of the upper bracket market, however in good old Springfield $250,000 is 2.7 times the median sales price! There were 27 home sales $250,000 and up reported closed through the end of business February 27. That’s about 14 selling a month. This equates into a 17.5 month supply of homes for sale over $250,000 in our market. The proposed tax increase will weaken demand for these homes.
Although the proposed tax changes will be crushing to upper bracket markets in higher priced areas, because of our affordability we won’t suffer as much. We’ll just suffer a little. But on the bright side for any buyer that has been looking to make a move up, this new tax law will have prices tumbling.
Once again the good intentions of our government will cause unintended consequences by stifling a housing market desperately trying to climb out of the abyss, will cause massive job losses, and harm charities throughout the land. All in the name of taxing the wealthy.
Like the exuberant coach on the sidelines celebrating a victory, the housing market has the government come along dumping a cooler of ice water over it, sending a chill down its’ spine.
The opinions expressed are solely those of Fritz Pfister, and not RE/MAX Professionals of Springfield or RE/MAX International.
