What Will Happen When Homebuyer Tax Credit Expires?

Everyone coming through the door is talking about this tax credit. They know exactly what it is and when it expires, and they’re rushing.

- Brad Cohen, Mason Dixon Funding, Rockville

Front page Washington Post story today on the Nov. 30 expiration of the $8,000 first time home buyer tax credit and the rush of buyers and the political debate surrounding it. The real estate industry is obviously lobbying hard for an extension and apparently there is a bipartisan proposal to maintain the credit in its current form until next June.

According to the post, 1.4 million first time buyers have taken advantage of the credit for a cost of around $11 billion. The estimated cost of the program through Nov is supposed to be $15 billion and extending it until next June would cost another $15 billion, according to Moody’s Economy.com’s Chief Economist Mark Zandi.

Will the tax credit get extended? What happens to the housing market, and the banks and the economy by extension, if it doesn’t?

The same kind of questions are pertinent concering the Fed’s mortgage backed securities purchases as well.

Can the economy survive without all this massive government stimulus of the housing and mortgage markets?

Comments

[Jasper M:]

"conomy survive without all this massive government stimulus of the housing and mortgage markets?"

I think you know the answer.
It survived such before.
There will certainly be a period of painful readjustment - like an addict going through withdrawal. In fact, JUST like an addict. But it will not be the end of the world. And the sooner we embrace the (painful) healing, the better

Sep 26 03:58 PM

[Michael Clark:]

They are talking of raising the tax credit to $15,000. Why? So the Homebuilders can survive and the taxpayer can help other people buy their houses? Why not just let the prices come down to where the houses are affordable -- that way the taxpayer doesn't have to help buy a stranger's house.

Sep 26 04:02 PM

[Michael Clark:]

Sorry I'm answering twice. Do we really want our grandchildren buying houses for people today who cannot really afford to buy their own houses, so that we can pretend that the economy is recovering? The more the Fed meddles in the alchemy of the economy, the more pain we will have, today AND tomorrow

"Will the tax credit get extended? What happens to the housing market, and the banks and the economy by extension, if it doesn’t?

The same kind of questions are pertinent concering the Fed’s mortgage backed securities purchases as well.

Can the economy survive without all this massive government stimulus of the housing and mortgage markets?"

Sep 26 04:05 PM

[apppro:]

I didn't buy a home recently, but all I can think is that if I were planning on plopping down 1/2 million or so on my new home - a mere 8 grand is not going to change my life altering purchase. What happens when the tax credit expires - squat. The same people who found and want to buy a home will, those that actually NEEDED that credit probably shouldn't be buying a home in the 1st place.

When will all you negative pundits just go away?

Sep 26 04:25 PM

[Tom Armistead:]

The credit gets a new set of players into the house appreciation and upgrade game. There were a lot of people who kept trading up from house to house until now they live in a McMansion.

We just need to keep priming the pump until we get the flow going again.

How about a credit for rehabilitated jingle-mailers? Or house flippers who got caught when the music stopped? If we could get them back into the game it would get going again a lot faster.

Or even for old fogies who paid off their mortgage long ago and need an excuse to splurge on an update?

In order to fund it we could wait a few years, once the game was going again we could tax home price appreciation - local governments could do it by raising poroerty taxes and the Federal Government could stop giving money to state and local governments.

Sep 26 05:31 PM

[MHGSanDiego:]

I would like to see the credit revised to provide a multiplier effect instead of plunking $8,000 into property equity. For example, what if the credit were applied to renewable energy? If a family could use the credit to buy solar cells, it would create some jobs AND a monthly energy savings in reduced electric costs. That would free monthly cash flow for that family that could be applied to consumption or savings for the rest of the time those improvements remained functional. The current tax credit is a one shot deal. The credit might also be applied to improvements that could reduce insurance premiums, like installing security system. Maybe water saving equipment? And so on.

Sep 26 08:04 PM

[Mad Hedge F...:]

pkn Wow! Risk reversals can be such a bitch! It was like someone flipped a switch at precisely 3:30 p.m. in New York, and suddenly the rally was over. The sell recommendations from market timers poured out like confetti at a New York ticker tape parade. The pundits, talking heads, and faux financial reporters offered many possible explanations. Was it the disappointing housing data, a waffling Fed statement, end Q3 profit taking, or the autumnal equinox? Perhaps it was the Business Week cover the saying the market would continue going up. The harsh reality is that the market fell simply because of its own sheer weight. PE multiples of 20 in the face of flat revenue growth, tightfisted banks, a catatonic consumer, imploding commercial real estate market, an approaching tsunami of new home foreclosures, and a whole raft of government stimulus programs about to expire, is not exactly a springboard for even high prices. What is fascinating is how all global risk assets fell in unison, from gold, to stocks, to private debt, to currencies, as I have long predicted. The only place to hide is cash. The market may take another run at the highs before year end. But the burden of proof has shifted from the bears to the bulls.

Sep 26 10:51 PM

[437339:]

Re

The ONLY housing segment that is moving is the low-end , entry leve l market . It is ONLY doing so because of the $8000 credit ! Any guess as to what will happen when this is DC'd ? This is a NO brainer . It will crash . Tom , the local governments tax collectors are ALREADY doing this . The values are plummenting , but the milage rates are going up ! Got to pay those teachers 70 % of their " last years " earnings for life + their healthcare ! Metro Atlanta 's educational system is a PRIME example of how " throwing money at schools " does NOT work ! What are the ratings 49 out of 50 ? Folks need to DEmand their pensions be cut . God , everyone else 's pay + benefits have been slashed

Sep 26 11:55 PM

[apppro:]

The only thing that I can agree with what you blogged is that 'someone DID flip a switch' on Wednesday at 2:30. We are all being controlled by a few short-term option traders/traitors who use SkyNet to manipulate our markets. Our financial markets were never meant to trade at speeds and quantities as they now do. They say it's a traders market - whoever they are, they are right. What we all need to do is STOP this 'Trader Mentality' and get back to investing and building our nation. Moving money around at SkyNet speeds, does not add any benefit to our society - just uncertainty.

And now, we have the Chinese giving 1 billion to these trader/traitor hedge funds. Are we all insane! What would stop them from shorting our defense industry into submission, just like they did to our financial system? Nothing!

Revised Tax Rules:

1. Capital gains under <6 months - 55% tax on capital gains
2. Capital gains 6 > 12 months - 45% tax on capital gains
3. Capital gains 1 > 2 years - 35% tax on capital gains
4. Capital gains 2 > 5 years - 18% tax on capital gains
5. Capital gains 5+ years - 5% tax on capital gains
6. Most critical of all — Institute a capital gains tax of 55% on ALL short sales not directly tied to a long buy by a licensed hedge fund. I'm tired of paying for the pure shorts 3rd vacation home.


On Sep 26 10:51 PM Mad Hedge Fund Trader wrote:

> pkn Wow! Risk reversals can be such a bitch! It was like someone
> flipped a switch at precisely 3:30 p.m. in New York, and suddenly
> the rally was over. The sell recommendations from market timers poured
> out like confetti at a New York ticker tape parade. The pundits,
> talking heads, and faux financial reporters offered many possible
> explanations. Was it the disappointing housing data, a waffling Fed
> statement, end Q3 profit taking, or the autumnal equinox? Perhaps
> it was the Business Week cover the saying the market would continue
> going up. The harsh reality is that the market fell simply because
> of its own sheer weight. PE multiples of 20 in the face of flat revenue
> growth, tightfisted banks, a catatonic consumer, imploding commercial
> real estate market, an approaching tsunami of new home foreclosures,
> and a whole raft of government stimulus programs about to expire,
> is not exactly a springboard for even high prices. What is fascinating
> is how all global risk assets fell in unison, from gold, to stocks,
> to private debt, to currencies, as I have long predicted. The only
> place to hide is cash. The market may take another run at the highs
> before year end. But the burden of proof has shifted from the bears
> to the bulls.

Sep 27 08:19 AM

[moose60061:]

My son is attempting to buy a condo right now.He has made 3 offers on 'short sale" properties offering to pay their asking price. Not one of the banks has responded and its been 6 weeks now (BOA and WFC). His realtor states that 1st Time Buyers are 75% of the market now. Take that away and watch those foreclosures increase and housing sink even further!


On Sep 26 03:58 PM Jasper M wrote:

> "conomy survive without all this massive government stimulus of the
> housing and mortgage markets?"
>
> I think you know the answer.
> It survived such before.
> There will certainly be a period of painful readjustment - like an
> addict going through withdrawal. In fact, JUST like an addict. But
> it will not be the end of the world. And the sooner we embrace the
> (painful) healing, the better

Sep 27 10:36 AM

[Redpenny:]

Hey 47, just cool off a minute.

Teachers are among the lowest paid of the professions. They get no bonuses, no profit sharing, no chance at stock options or any other of the forms of compensation that those in other professions enjoy. Most, if not all, of them use their own money to buy supplies for the students because education funding in this country has been cut to the bone. Most of the districts, at least in California, have cut the healthcare component of retirement. Unless you are truly altruistic one of the only allures of teaching as a profession is the retirement, if and when you get there. The money that gets 'thrown' at schools does not generally go to teachers pay. And if it does it still, in many cases, will not bring their salaries up to par with similar professionals at comparable experience levels. Would you go and be a teacher? Education is the solution, not the problem. We need to elevate teaching and education to the level of importance that oh say, investment banking or venture capitol now enjoy.

You want to cut pay? How about executive bonuses on Wall Street, do they actually contribute more to this country than the basic science education in schools that will produce the people who will drive the next wave of technology? Or maybe you've not had enough CDS's sold lately on rotten mortgages that you will have to pay for with your taxes and that still put money in the pockets of the guys at GS.

Our country gets stronger then better we educate the people that live here. That starts with children and that starts with the people that teach them.


On Sep 26 11:55 PM 437339 wrote:

> Re
>
> The ONLY housing segment that is moving is the low-end , entry
> leve l market . It is ONLY doing so because of the $8000 credit !
> Any guess as to what will happen when this is DC'd ? This is
> a NO brainer . It will crash . Tom , the local governments tax
> collectors are ALREADY doing this . The values are plummenting ,
> but the milage rates are going up ! Got to pay those teachers 70
> % of their " last years " earnings for life + their healthcare !
> Metro Atlanta 's educational system is a PRIME example of how " throwing
> money at schools " does NOT work ! What are the ratings 49 out of
> 50 ? Folks need to DEmand their pensions be cut . God , everyone
> else 's pay + benefits have been slashed

Sep 27 11:08 AM

[dano123:]

As a homebuilder, I am admittedly biased, but I can see some benefit to credits. I look at it like an airplane that has run out of gas. The plane is going down no matter what. The only question is, does it glide to gentle landing, or does it dive into the ground nose first at a high rate of speed killing everyone on board?

I think the credits help prevent a total dive and crash. I am not sure they will succeed, I think they buy us time, in hopes some other forces may come into play that will help overall economy recover and relift the plane.

As there is not enough time left to start and deliver a new home for the Nov. 30 deadline, I predict you will see a plummet in new home starts for Sept, Oct, and Nov. So if they are going to extend it, I predict they will before the dealdline is up.

Sep 27 08:52 PM

[marcia676a:]

You want people to buy the more expensive homes? Offer the $8000 to anyone, not only first time buyers. They are offering the $8000 to the weakest buyers of the lot, the ones that are at the greatest risk of losing their jobs. I think another bubble is growing. Multiple offers because of low inventory. Banks have the foreclosures on their books but are letting them trickle out onto the market to get the multiple offers. This is happening in the San Francisco Bay Area real estate. Listing a 3 bedroom rancher for $399,000, getting 14 offers, and selling in the high $400,000s? Many of the loans have only FHA 3-1/2 down payments. Then we will have a bunch more loans that will reset from the 5 year interest only programs and these will hit during 2010-2012. You have not seen the worst yet. Are we going to keep giving money for people to buy houses? Hope not.

Sep 28 01:19 AM

[User 417202:]

This discussion earlier was talking about the "cost" to the Government. What cost? It's a tax credit. The "spending" the government is doing isn't spending. They are giving you YOUR MONEY back. You can argue semantics here but, the bottom line is govenment spending, real spending, is the issue. Our government has got to quit preaching to us to get our spending under control. WE have got to get them undercontrol.

The tax credit is a one time shot in the arm. As soon as this goes away the real market will get back in control. As a real estate professional in my market housing was so overpriced I had to laugh, shake my head and wonder what people were thinking. They were paying in some cases 50-75% more than the actual construstion cost (I am being conservative here also).

I am trying not to rant here so, I'll stop now

Sep 28 11:54 AM

[coopster:]

Rant on! I thank all of you for your points of view.
I actually really looked at houses this weekend; but don't have much to put down (ex still hasn't paid me for my half of the old one!) but I'm torn; wait for the $8k to go away, maybe get more than that on price reduction afterwards, or risk not having financing available later?
Would consider building again, but just down have the time (or patience) to deal with subs. But am sure not willing to be the final patsy on the top of house of cards.

Sep 28 12:31 PM

[jkerkez1:]

I am renting in Atlanta a 4bd/4ba 6 miles from midtown in a 2006 built house for 1300/month and loving it. It's a beautiful house but was built shoddily - I shudder to think what it would have cost me to pay for the repairs done in the last 18 months solely for absurd construction oversights. No desire to buy at all, renting thru a management company, no interaction with the actual owner, makes it a very easy transaction. As a previous homeowner, I don't "feel" like less of a person for renting a house, actually I feel better for living completely debt free. And let's be honest...who is really a "homeowner" anyway...more like "debt-slave" to be sure.

The bubble is over and ain't coming back folks. Tax credits, low interest rates, yada yada....when it's all said and done, it doesn't change the fact that you are buying a DEPRECIATING asset and one that will very likely depreciate at the same rate as the still-deflating credit balloon and growing unemployment/foreclosure rate.
Good luck with that tax credit, though. The government (aka NRA puppets) are playing the role of drug dealer: Here you go kid, the first hit's free!

Sep 29 10:49 PM