Forest Sector Recovery depends on outside market forces

Resolute CEP Logs Forestry Endangered species

LogsTHUNDER BAY – Lumber and forest products from Northern Ontario are one of our region’s exports to the United States. Seeking a recovery of the forestry sector is one of the often debated topics in both Ottawa, and Queen’s Park. For a full recovery in the area of softwood lumber, one of the keys is a stronger American economy.

The election in the United States could impact the market for housing in the U.S., however looming problems with the county’s growing debt may hamper or slow any recovery that will trickle down to the forest sector in our region.

“There’s little doubt that the housing sector has begun to recover,” said Wendy Forsythe, executive vice president and head of global operations with Atlantic & Pacific Real Estate. “Home prices have increased in most metro areas. At the same time, consumer confidence is at a five-year high and foreclosures are at their lowest level since 2007.”

So what could go wrong? While the housing sector has shown improvement, unemployment remains high and the Federal Reserve expects an additional one million foreclosures in 2013. Another looming issue concerns Washington: Will the housing sector weaken as a result of tax changes and other choices made by elected officials in the next several months? Here are the three big issues to watch:

Mortgage Interest Deductions

“When Americans finance or refinance real estate, the interest they pay is typically tax deductible,” said Forsythe. “The mortgage interest deduction lowers the effective cost of real estate borrowing, makes homes more affordable and thus encourages homeownership.”

Although the mortgage interest deduction is limited, the current limit impacts few homeowners because most loans are far below the cap. For instance, owners can generally write off interest on combined first- and second-home debt worth as much as $1 million plus another $100,000 for a home equity line of credit.

But what if the rules change?

In 2010, a report from the bi-partisan National Commission on Fiscal Responsibility and Reform — also known as the “Simpson-Bowles Commission” — said that mortgage interest deductions should be limited to the interest on not more than $500,000 in residential debt. There would be no write-off for second homes or home equity lines of credit according to the Simpson-Bowles report, a proposal which is taken seriously in Washington as a deficit reduction starting point, but raises several questions:

  • If the maximum interest deduction is reduced, will homes      in high-cost areas such as New York City, Boston and multiple areas within      California be less desirable — and will real estate prices fall as a result?
  • If we end second home interest write-offs, what happens to property values in the vacation areas where millions of people now live      or vacation?
  • If we reduce the home interest deduction, will it have a trickle-down effect and cause losses in other areas of the economy      dependent on home ownership (such as home improvements, retail furnishings  and appliance sales), which ultimately results in lower tax revenues for federal and state governments and thus potentially bigger deficits?

Forsythe points out that “money from home equity lines of credit is often used to pay for college tuition, major home improvements and starting small businesses. If the interest associated with financing such expenses is no longer deductible, then real costs will rise. For some households, an end to the mortgage interest deduction is not just a tax increase — it’s a barrier to a better education, improved housing and job creation.”

Debt Forgiveness

It used to be that if you did not fully repay your mortgage the unpaid debt was regarded as taxable income. But, in 2007 the government passed the Mortgage Debt Relief Act, legislation which generally excludes from taxation up to $2 million ($1 million if married filing separately) in unpaid mortgage debt on a primary residence. The catch? The exclusion is set to end December 31, 2012.

“Right now, debt relief encourages short sales instead of foreclosures, abandoned homes and community blight,” said Forsythe. “Without such relief, owners might prefer foreclosure, an often drawn-out process which in some states can keep owners in the property for a year or more. Unfortunately, foreclosures also drive down local home prices. So it’s in the public interest to continue debt relief legislation beyond 2012.”

The Fiscal Cliff

Starting in January, federal spending will automatically be reduced for most government programs under the Budget Control Act of 2011. This automated process — called “sequestration” — will stop unless a “special committee” can pick and choose reductions worth at least $1.5 trillion over the next decade or if new legislation is passed.

We are now at the “fiscal cliff.” As the Office of Management and Budget explains, “The specter of harmful across-the-board cuts to defense and nondefense programs was intended to drive both sides to compromise. The sequestration itself was never intended to be implemented.”

“A resolution to the budget crisis is necessary. Otherwise, the economy could face substantial disruption,” said Forsythe.

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