The Inflation Reduction Act, passed by both houses of Congress and signed by President Biden on Aug. 16, became a compromise for the much larger Build Back Better plan, which was introduced to assist in fighting inflation, increased climate/global warming, and certain medical cost issues.
One of the key issues was having all corporations pay a minimum of 15% income tax. This is good news for homeowners who might have previously been concerned about additional income taxes or possibly the loss or change in our interest deduction on primary and secondary home mortgages (within certain limitations, ask your CPA), (reduced from $1 million to $750,000 through 2025 as part of the Tax Cuts and Jobs Act of 2017), which has been the most popular deduction.
It should also have very little or no effect on REITs or small-scale developers. Other benefits are clean energy credits from your utilities and further massive tax rebates on the installation of solar and renewable energy, community solar, and wind farms. This will also enhance homeownership and real estate investment going forward while reducing energy costs which dramatically increased in 2022.
There is a huge problem, however, that the legislation hasn’t addressed: the historically low housing supply affecting American families. Higher interest rates cause higher costs, reducing the incentive for building multifamily units, also imposing more restrictive and higher energy code requirements while inflated labor costs have slowed things down. Even though the United States needs more housing but is facing higher financing costs, the market has cooled off substantially in many states. Developers and builders are being much more cautious as documented by fewer building permits leading to a reduction in new construction. This is something that should absolutely be addressed immediately in order to keep us out of a more severe and debilitating recession to accommodate those qualified buyers who need and want to own.
According to Forbes Magazine on Aug. 4, Moody’s Analytics, the financial intelligence service has predicted that housing prices will likely shift in 414 regional housing markets throughout the U.S. between the fourth quarter of 2022 and the fourth quarter of 2024. Of those markets, Moody’s Analytics predicts 204 of them will see increases in prices over that time period, probably due to extremely low availability of homes and I believe more stable interest rates.
Fortune Magazine found through research and data firm CoreLogic that 68% of metropolitan markets, especially our local markets in Nassau, Suffolk, and Westchester counties, are overvalued. However, 24.4% are normal and 7.6% are undervalued.
Legislators in Washington must have received sufficient and crucial information from a multitude of experts and analytical service companies. I think that they were careful not to further affect the real estate market with their new regulations. The profound effect that the doubling of interest rates had on curbing our serious inflation issues was sufficient to really change the profile of our crazy and insane real estate market.
This had to be done as growing legislation negatively affecting real estate would have created an even greater, more tenuous, and negative environment for buyers and sellers. Although real estate has been an instrumental factor in causing our inflation, I believe it has had more positive effects in increasing one’s wealth than negative ones.
When one buys a home, they then begin to purchase goods and services, which is a plus for our economy as 70% of it comprises consumer spending. According to CNBC research, 42% of homeowner’s equity wealth had increased by the end of 2021. The profit on a typical home sale in 2021 was a little more than $94,000 an increase of 45% from 2020 and 71% higher profits from the period prior to the pandemic. Usable equity in one’s home grew by 2.6 trillion in 2021 to a monumental total of 9.9 trillion.
But an excessive amount of money was freely given out during the pandemic, sometimes to the wrong individuals and companies, causing greater inflation (higher stock prices) and supply chain shortages from the lack of employees across the supply chain, shortage of raw materials and bottlenecks, cyber-attacks and also weather-related events, too. We should hope for a soft landing, but there are so many variables in the mix it’s anyone’s guess how it will all end up.
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Philip A. Raices is the owner/Broker of Turn Key Real Estate at 3 Grace Ave Suite 180 in Great Neck. He has 40 years of experience in the Real Estate industry and has earned designations as a Graduate of the Realtor Institute (G.R.I.) and also as a Certified International Property Specialist (C.I.P.S) as well as the new “Green Industry” Certification for eco-friendly construction and upgrades. For a “FREE” 15-minute consultation, a value analysis of your home, or to answer any of your questions or concerns he can be reached by cell: (516) 647-4289 or by email: [email protected] or via https://WWW.Li-RealEstate.Com
