Economy Emerging as Top Election Issue to Homeowners

It’s a major reason that Democrats may lose more seats than normal.

In midterm (non presidential) elections, the President’s party usually loses Congressional seats, especially when it also controls both the U.S. Senate and House of Representatives. Also, as in past elections, the economy is a big factor in the voters’ mood. In this election year, voter perceptions of Congress are particularly negative. The Tea party movement is the most visible manifestation of their dissatisfaction. However an astounding 85% of voters disapprove of the current Congress, so voter disaffection obviously runs across both parties, and includes the growing population of independents as well.

The conservative Tea party movement has been gaining traction, but for several reasons its success may also serve to reduce Democratic losses in the November elections. In some cases Tea party candidates or conservative candidates receiving Tea party support in their state may be positioned even farther than normal from the political center. In a number of races, those candidates defeated moderate Republican incumbents in the primaries. Since election success is much about winning the support of moderates of both parties as well independents, those primary results could doom the Republicans’ chances of taking over of the U.S Senate and/or House of Representatives.

In a September CNBC poll, the most important voter issue was the economy and jobs (42%). Although neither party had a good showing on this issue in the CNBC poll, voter support in other polls has been steadily shifting towards the Republican Party on this issue, no doubt in large part a result of the persistence of the current recession.. Following it was the deficit (14%), healthcare (13%), education (9%), Iraq and Afghanistan (6%), Social Security (5%), immigration (5%), and taxes (4%).

The importance of the economy and jobs may explain why the Senate Democratic leadership sought to regain the high ground on the economy and jobs by forcing a vote on an anti-outsourcing bill on September 29. The legislation would have ended plant closing tax deductions for U.S firms moving jobs overseas, imposed a new tax on the resulting imported products, and created a two year payroll tax holidays for U.S. jobs that were repatriated from overseas operations. The legislation failed a filibuster override vote, 53-45, but their vote for the measure will provide some cover on this issue to Senate Democrats up for election, as well as require some explaining by Republicans/Tea party candidates up for election who opposed it.

Of the three main components of this legislation, the American Homeowners Grassroots Alliance supported the two year payroll tax holidays for U.S. jobs that would be repatriated from overseas operations. AHGA is concerned that the remaining two provisions may only delay the inevitable, and may also lead to retaliatory legislation by other countries. It would be counterproductive to U.S. job creation, for example, if other countries with major auto manufacturing plants in the U.S. decided to try to bring current U.S. jobs in that sector back to their countries.

The importance of the economy and jobs also explains why the Democratic Congressional leadership decided to defer the vote on the extension of the Bush era tax cuts until a post-election lame duck session. President Obama and the Democratic Congressional leadership believe that the Bush tax cuts should be extended only for families making more than $250,000 a year.

In the minds of many voters this particular tax policy will also have a significant impact on the economy and jobs. That makes it very important issue even though voters aren’t particularly concerned about other tax policy issues per se. In the same CNBC poll, 55% of voters said they believed that increasing personal income taxes on anybody would slow the economy and kill jobs. In the CNBC poll, 40% support cancelling those tax cuts for higher-income individuals. The Democratic leadership’s deferral decision was clearly made to deny political ammunition to Republican and Tea party candidates.

AHGA supports limiting the extension of the Bush era tax cuts to families earning less than $250,000 for several reasons.  One high priority in the CNBC poll is to begin reducing the deficit, and requiring Congress to find offsetting budget cuts and/or less onerous tax increases in order to extend them is a step in the right direction. One less onerous tax increase that would also bring more fairness into the tax code is to let the expiring Bush-era tax rates for families making more than $250,000 (or individuals making more than $200,000) to expire while making the cuts for those making less permanent. For one thing, this increase would affect a very small percentage of taxpayers.

Allowing the current federal income tax rate to expire for a typical individual earning $200,000 would result in an effective federal income tax increase from $22,000 to $24,000 – from 11% of their income to a whopping 12%. Even a couple earning $300,000 would face only a $4,000 tax increase. Such modest increases relative to their remaining disposable income are unlikely to limit their discretionary spending. Not until you get above income levels of $1 million, a very tiny percentage of taxpayers, are the increases significant.

In addition, tax increases on the very wealthy have not been shown to significantly dampen either investment or consumer spending. We have experienced a healthy and growing economy during times when marginal tax rates on the wealthy were very high (they were 91% under Dwight Eisenhower, 70% under Richard Nixon and  50% at the beginning of Ronald Reagan’s term). Indeed, higher marginal income tax rates provide a bigger incentive for business owners to invest because they result in a larger tax deduction, thereby reducing their tax liability. Do the math: at a 91% tax rate, a $10,000 piece of equipment costs the small business owner $900 after taxes. To end up with $10,000 after taxes to pay for an expensive European vacation, the small business owner would have to take more than $100,000 out of the company. No wonder many smart business owners invest aggressively in their businesses when marginal income tax rates are high. At today’s lower marginal rates wealthy small business owners and investors have less incentive to reinvest in the business and are more likely to take money out of a business to pay for that expensive European vacation or other nonproductive purposes that neither strengthen our economy or create jobs.

We should also allow the Bush tax rate cuts for the rich to expire In the interest of fairness. We have gone full circle in terms of income taxes on the rich. They used to be unfair because they were too high. The 91% rates under Dwight Eisenhower and 70% under Richard Nixon were unfair, usurious and confiscatory, and should never be reinstated. Today they are unfair because the wealthy often pay a lower effective rate than the marginal rates paid by middle income taxpayers.  The U.S. now taxes the wealthy at nearly the lowest rate of any developed country. An effective 12% income tax on someone with a $200,000 income is unfair when the marginal federal rate on taxable incomes of $16,700 - $67,900 was 15% last year. For political expediency it may be necessary to extend the tax rate cuts for the rich for one more year in order to get the legislation through the Congress. After that we should allow the tax rates on the wealthy to rise to previous levels in the interest of fairness, because we need the revenues to help reduce the deficit, and because the increases will help stimulate the U.S. economy and create jobs.

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Making More Out of Less

The trend is affecting new homes, remodeling and home decorating.

One of the victims of the housing bubble is the McMansion. Yes, they are still being built, but despite the great benefit of the mortgage interest deduction to high income homeowners, other factors are slowing their proliferation. Chief among them are growing doubts about the long term home appreciation potential and the owners’ increased risk of finding themselves much further underwater should another housing downturn occur. The economy is a significant factor as well. Not only are new home buyers opting for smaller homes, but more homeowners are choosing to remodel instead of buying a larger home.

The result is a trend towards “rightsizing” new homes – making them big enough and well enough equipped, but not going overboard just to impress the neighbors. The same factors are affecting remodeling projects and home decorating options. According to the National Association of Home Builders (NAHB) after growing in square footage for nearly 30 years, the average square footage of single-family homes is now declining. The average size of a single-family home in the United States peaked at 2,521 square feet in 2007. A 2009 US Census bureau study found it had shrunk an average of 2,438 square feet. NAHB attributes the decline “to phenomena such as an increased share of first-time home buyers, a desire to keep energy costs down, smaller amounts of equity in existing homes to roll into the next home, tighter credit standards and less focus on the investment component of buying a home...Many of these tendencies are likely to persist and continue affecting the new home market for an extended period." NAHB also noted that fewer bedrooms and bathrooms are being built and that the several decade trend toward multilevel houses shifted back in the direction of single level homes last year. The American Homeowners Foundation believes that these trends are also being driven to some degree by the growing number of retiring/downsizing baby boomers.

Several trends are noticeable in both new homes and remodeling projects. “More bang for the buck” is the priority for more and more homeowners. This is also reflected in more careful thought about just how big the kitchen/bath/family room/deck really needs to be. Not every room gets the full luxury treatment. You can save thousands of dollars by focusing on effective space design and using less expensive components, such as cabinets or countertops. Despite the cutbacks on size and cost, some types of home investments continue to grow. The percentage of new homes and remodeling projects incorporating “energy star” (very energy efficient) appliances continues to increase for example, even though the homeowners may not opt for the most expensive model. Available federal tax credits for home energy efficiency enhancements such as insulated windows, etc (set to expire at the end of this year) are also helping to shore up homeowner spending in this area.

More homeowners are choosing to redecorate rather than remodel for many of the same reasons. Many small rooms in older homes can be made to seem larger and be made easier to live in through skillful redecorating.

There are many ways to use color, furniture selection and placement, and other alternatives to make a room seem larger. Traditional ways to achieve that objective are to use mirrors and white/light colored walls, while avoiding bold patterns, drapes that block window light, bulky furniture and clutter. Glass topped kitchen or coffee tables and/or desks occupy less visual space and are also good for small rooms. Eliminating knickknacks and/or consolidating them to a single display area will also help. You can often get away with one bold patterned object in a small room if it is balanced by solids or smaller and muted patterns. Similarly a large overstuffed chair may not make a small room feel more confined if it replaces two smaller ones. Built-ins such as Murphy beds, bookshelves, window seats, shallow cabinets etc. can maximize space utilization and may also improve the room design.

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