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Energy & Credit Changes Place Pressures On Real Estate

Look For Convulsions Ahead If Tax Benefits Change For Homeowners

Bill Gross, CEO of Pimco (the world’s biggest bond investor), ranked 10th in Fortune magazine’s “The 25 Most Powerful People in Business,” says U.S. energy markets have reached a “tipping point” due to under-investment by energy companies in developing new supplies and a lack of investment in refining capacity. Furthermore, he says, the high energy costs will slow the economy...we will see a significant pullback in consumer spending next year.

And if higher energy prices and rising interest rates aren’t enough, a presidential commission on tax reform is looking at the mortgage-interest deduction. (The mortgage-interest deduction saved homeowners $61.5 billion last year.) Changing the deduction tax benefits, even if done slowly, could cause short-term convulsions in the market as buyers recalculate what they can afford.

With a rising federal budget deficit, the commission for tax reform says “everything is on the table.” Which would include the 1997 elimination of capital-gains for home sellers who profit...now $250,000 for individuals and $500,000 for couples.

It was originally contemplated, by a nonpartisan budget group, that the capital-gains measure would cost the government $5.8 billion in lost revenue over 10 years. Instead it’s been 60 times that or $348 billion. One modification to be considered is the length of time one must live in the house to quality for the capital-gains exclusion, which is currently two years.

In short, a lifestyle built on cheap energy costs and low mortgage rates (including home ownership tax benefits) is in jeopardy.