This post is based on an article from the May 19-20, 2012 edition of The Wall Street Journal.  I’ll describe the potential changes if the tax cuts are not extended (it’s not certain) and how I believe this will affect housing markets, especially Kitsap County’s.

The tax cuts enacted by President Bush are scheduled to expire at the end of this year unless extended by Congress.  If no action is taken your tax rate will increase for capital gains, dividends and other taxable income.  And this will be brutal for some of us!  Here are some specifics that will affect most folks:

• The 10% bracket will increase to 15% for taxable income up to approximately $18,000 ($900 increase)
• Taxable income beginning at $18,001 is currently taxed at 15% but I’m not certain if this will be increased (hopefully not)
• Taxable income at beginning at somewhere around $75,000 is currently taxed at 25% will be taxed at 28%
• The existing bracket of taxable income being taxed at 28% will be increased to 31%
• The existing bracket being taxed at 33% will be increased to 36%
• The existing bracket being taxed at 35% will be increased to 39.6%
• Long-term capital gains are now taxed at 15% and that will increase to 20% (or 18% for assets acquired after December 31, 2000 and held for five years or more)
• Dividends currently taxed at 15% will now be taxed at 39.6%
• Higher income earners ($175,000 married or $87,500 single) will lose some of their itemized deductions 

Politics are at play so we won’t know until the last possible moment, probably the week of December 24-28, what the tax rates will be for 2013.  We’ll have to wait just like the IRS.

Here’s how I believe this will affect our housing markets and I’ll use Kitsap County as an example because I have access to detailed income statistics as well as housing statistics.  I’m using my handy-dandy Texas Instruments BAII financial calculator for my calculations and these are the factors:

• Using existing tax rates which are scheduled to expire December 31, 2012
• Median family income for 2006-2010 is $59,549 per household ($4,962.42 per month gross)
• Average home sale price is $259,405
• 30 year conventional mortgage at 4% annual interest rate
• Add 20% of mortgage payment principal and interest (P&I) for property taxes and homeowner insurance (PITI)
• Cash downpayment 10% of contract sale price 

Using the above parameters our average family would be able to purchase a home with a negotiated purchase price of $269,590.45 and a downpayment of $26,959.05.

However, if the tax cuts are not extended, our average family’s income would be reduced by about $230 per month affecting disposable income.  A family would be able to purchase a home with a negotiated purchase price of $257,094.32 and a downpayment of $25,709.43.

We’re borderline for the median income family purchasing an average priced home but I question whether a family is comfortable with a purchase if they know disposable income will be reduced.  And there are other factors at play such as: increased price of rent; rising interest rates; lending qualification standards; and especially the overall economy. 

My conclusion: if families are hesitant to buy, housing markets will not recover until circumstances are corrected.  This affects sellers as well as buyers because most sellers cannot buy until their existing home is sold (the classic catch-22 situation).

If you’re thinking about stepping forward and purchasing a home (or making a purchase in general, say a car) and not paying cash, whoever is providing financing is going to check your credit immediately.

You can get one step ahead in this process by contacting each of the credit reporting bureaus (Experian, Equifax and Transunion) and request a credit report.  It’s FREE and you can do this once a year and you should contact each bureau because all have different procedures collecting your infomation.  You’ll need to provide name, address, birthday and social security number but these company’s websites are secure.  The only thing you won’t get is your actual credit score but at least you’ll be able to check for judgements or incorrect information (which you can correct).  I mentioned checking each bureau because the prospective lender will request a tri-merge report to compare the information.

To get started click here and you will be taken to the annual credit report website where you can select the credit bureaus.  Once on a bureau website you’ll be asked for personal information in the process.  There are links which will allow you to get your credit score but this will cost $7.95 or so.  Also, checking your credit report will not count as a formal request which will show up on your report.