We’ve all been hearing about the Fiscal Cliff for months now, and for good reason. Of any major issue, the Fiscal Cliff poses the greatest threat to economic recovery and improving real estate conditions. This issue is even bigger than the European debt crisis and the escalating tension between Iran and Israel.
What is the Fiscal Cliff? Earlier this year, when Congress could not reach agreement on a national budget and how to handle the deficit, both The House and Senate agreed to a combination of deep spending cuts and higher taxes. A major consequence of this agreement included the expiration of hundreds of billions of dollars in Bush-Era tax cuts and massive automatic cuts in defense spending. Experts have predicted that these cuts would impact our GDP or Gross Domestic Product by as much as 4-5%. This would result in a negative 3% growth if you take into consideration that the GDP numbers just released for the 3rd quarter only showed GDP growth of 2%.
Although most experts believe that Congress and the administration will not allow us to go over the Fiscal Cliff, the three possible scenarios that must be considered by homeowners thinking about selling are as follows:
- The “Compromise” Scenario – This scenario would lead to some tax hikes and some spending cuts. It is unlikely that payroll tax cuts would be extended. It is also unlikely that health care reform would be changed. Both issues are likely to have an adverse impact on business and job creation. A compromise would also do little to solve the deficit situation. A seller is likely to be exposed to substantially more risk in 2013 under a compromise.
- The “Delay” Scenario – Under this scenario, Congress can kick the can down the road by agreeing to delay the Fiscal Cliff until a new Congress and possibly president take office. Under this scenario, sellers would be exposed to even greater uncertainty and risk in 2013.
- The “Do Nothing” Scenario – Under the “do nothing” scenario, neither party agrees to give in and the U.S. goes over the Fiscal Cliff. This is the worst case scenario with devastating consequences on the economic and real estate recoveries.
One need only look at the current economic conditions in Europe with massive expenditures in Greece and a 25% unemployment rate in Spain, to realize that we’re a long way away from a resolution.