What Does the Fiscal Cliff Deal Mean for Housing?

Lawmakers are patting themselves on the back, and President Obama just signed a fiscal cliff bill into law via autopen from his holiday vacation in Hawaii, but is Washington just delaying the inevitable when it comes to the fiscal cliff? After all, the new law is only good for two months, which means there’s more uncertainty – which is not exactly what buyers want to hear as we head into 2013. So, what does the fiscal cliff deal mean for America’s housing market?

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The biggest thing this deal did is prevent a major economic meltdown. By coming to a deal, lawmakers prevented most Americans’ taxes from going up considerably. As long as you earn less than $450,000, instead of paying more to Uncle Sam, you can, theoretically, use that extra money to put towards a down payment on a new house or keep yourself out of foreclosure. Without this deal, the average American would have wound up paying thousands of dollars more in taxes. That means Americans would have had less money to spend on other things, like new homes!

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Also included in the last-minute fiscal cliff deal were extensions for both the Mortgage Debt Forgiveness Relief Act and the Mortgage Interest Deduction for one year. Experts had worried that if both had been allowed to expire, it would have dramatically increased the number of foreclosures. With a glut of foreclosures hitting the market, it would have driven down sales prices, which would have caused home values around the country to tumble once again – right after they were starting to show some a little bit of promise.

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Mortgage Interest Deduction is also safe – meaning that the interest you pay on any loan used to buy, build, or make improvements to your home is still tax deductible. However, your taxes weren’t completely spared. Since the payroll tax cut was allowed to expire, working Americans will now pay 6.2% of their paychecks to Uncle Sam (instead of the 4.2% they were paying last year). Once you figure everything into the equation (including employers’ contributions), it means that 15 cents on every dollar are now going towards payroll taxes. In the end, that’s money that Americans won’t have to put towards housing and all of the other things that make for a healthier economy,

What about mortgage rates? Remember, mortgage rates are like the “temperature” of the economy. So, what did they do after lawmakers announced that a deal had been reached? Now that complete fiscal cliff disaster has been averted (we had more of a “soft landing” off the cliff, rather than the “hard thud” that financial experts had been fearing for months), mortgage rates are expected to inch higher. Right after the bill was signed into law, the average 30-year fixed mortgage rate actually dipped slightly to 3.58% (but experts say it will trend upward sooner rather than later). The average 15-year fixed mortgage rate went up to 2.88% as soon as the deal was announced.

The biggest problem mortgage rates will face now is the debt ceiling fight. Remember, that was one key issue that wasn’t addressed in the stop-gap fiscal cliff deal. When lawmakers start working on a debt ceiling deal (Republicans want a lower ceiling; President Obama wants to be solely in charge of the debt ceiling himself), the fighting and uncertainty could send mortgage rates tumbling once again. Bottom line – until lawmakers come to a permanent solution, don’t expect the words “fiscal cliff” to stop affecting the housing market anytime soon!