The potential housing crisis on the horizon

Jonathan Sweet, Editor In Chief

Jonathan Sweet, Editor-in-Chief
December 14, 2012
Filed under Jonathan Sweet

Lost amid all the posturing about the fiscal cliff, sequestration and such is the very real possibility that the finally recovering housing market is about to take a big hit.

This is not only bad for the housing market, but for the economy as a whole. Consumer confidence will take a big hit if the housing market starts to slide again.

Allow me to explain. Short sales – where the borrower negotiates with their bank to sell a home for less than they owe – have been a major part of the market over the last couple of years. They were 22 percent of home sales in the third quarter of this year, according to RealtyTrac. They’ve helped homeowners avoid the credit hit of foreclosure, helped banks avoid the legal costs and helped keep neighborhoods in better shape than they would be with a sea of empty homes.

Unfortunately, there’s a very good chance we’re going to see a surge in foreclosures next year. That’s because barring a last minute extension of the 2007 Mortgage Forgiveness Debt Relief Act, homeowners who sell their homes in a short sale will be facing big tax bills.

Typically, forgiven debt is taxed as income, but that rule was suspended as part of the 2007 act that expires at the end of this year. According to RealtyTrac, the average sale price of a short sale was more than $90,000 less than the amount owed on the mortgage. That means many homeowners would be facing tax bills of $25,000 or more. If someone can’t afford their mortgage, they can’t afford that.

The likely result is that homeowner will now opt to just let the bank have the home and walk away without the additional tax bill.

Forget the fiscal cliff. This is what scares me.

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