Why the Home Buyer Tax Credit Is a Bad Idea

So, the home buyers tax credit is in the news again and it's becoming quite controversial...

Proponents would like to see the program extended well into next year and have the credit expanded to $15,000 (or more), removing the first-time home buyer requirement which, by the way, really didn't restrict this to new home buyers at all, just those who hadn't owned a home in the last three years.

The most cogent argument against the government providing expanded subsidies for its citizens to buy property in a sinking real estate market is that the cost per incremental home sale would jump to, by some estimates, almost $300,000.

You see, most people who took advantage of the first tax credit would have purchased a home anyway, so the government expense per "incremental sale" tends to soar.

However, since the total cost of the current program and the proposed new one would only be in the tens of billions of dollars, rather than the hundreds of billions or trillions of dollars that Congress has become accustomed to while dealing with banking bailouts and federal budget deficit, it's hard to imagine that anything other than a huge public outcry will prevent the program from surviving well into 2010.

In an effort to offset some of the negative press about the program - its relatively low "bang for the buck" and allegations of fraud in the hundreds of millions of dollars that include claims being filed for those who don't qualify, most notably by a four-year old - the National Association of Realtors and the National Association of Home Builders have joined forces, taking out a full-page ad in yesterday's Wall Street Journal claiming that extending and expanding the wildly popular program would do the following:

• Create 350,000 new jobs
• Inject more than $28 billion into the US economy
• Generate $12 billion in additional tax revenue

It's hard to argue with how nice it would be to create that many jobs and provide such benefits to both the US economy and government. However, it also would have been nice to have some sort of note in the advertisement (one that likely cost upwards of $250,000) as to how those figures were determined.

A simple asterisk with a reference to a white paper or website would have made the numbers much more convincing, particularly in light of figures being provided by those who oppose an extension.

Then again, why shouldn't we just trust the home builders and realtors?

The arguments for extending the home buyer tax credit program are universally the same. It supports a struggling housing market and, as we've heard many times before, until the housing market recovers, the broader economy will not recover.

Just once it would be nice to hear some policymaker or some real estate industry professional say that, in order for the economy to stabilize, home prices must revert to more normal levels - say, levels that are supported by wages or incomes - rather than the familiar refrain that home prices must simply stop falling.

It really paints the wrong picture about what is going on in the nation's housing market if, by historical measure, homes are still overvalued by a large margin and the government takes extreme steps to support those valuations.
Including freakishly low mortgage rates - under 5 percent for a 30 year fixed-rate loan as of last week - and low or no money down loans from the FHA and USDA (yes, the USDA), the US government has created many of the same conditions that were present when the housing bubble was at its peak.

The only thing they're doing different this time is verifying income.

With many respected analysts calling for home prices to continue to decline through 2010, efforts by the government to prop up the housing market through tax credits may end up backfiring over the long run.

Since housing bottoms are normally extended affairs, usually lasting for years, this one likely to persist even longer commensurate with the size and duration of the boom that preceded the bust, this program has the potential to set the housing market back for many years.

The reason?

Once the tax credits, low interest rates, and low down payments go away, homes that seem quite affordable today could all of a sudden turn out to be quite expensive.

Pushing interest rates back up two or three percentage points, requiring 10 percent down, and not offering the carrot of a $8,000 or $15,000 tax credit will, all of a sudden, transform a house that once looked cheap into something that is prohibitively expensive.

Under normal market conditions, that would make prices fall even more.

Toss in the realization by hundreds of thousands of 2009-2010 home buyers that took advantage of this government largess only to watch the value of their homes continue to decline - duped by the government, it would appear - and homeownership might be set back for another decade.

Like most other aspects of the financial market rescue that has been going on for the last year or so, this appears to be another case of throwing money at a problem and asking the hard questions later (or not asking them at all).

How long can we continue to operate like this?

We'll find out soon enough...

As for our personal housing situation, we've been renting for the last five years and see no reason to stop doing so now.

Thankfully, not only do we still have quite a ways to go on our latest one-year lease, but we're still quite undecided about where we want to call home for the rest of our lives and both of these factors are helping to make any near-term house purchase decision quite an easy one.

Next year is another matter - with or without the help of the government and their incentives.

While visiting an open house yesterday, the anxious sales agent made sure (in an annoying sort of way) that we knew the home buyer tax credit will soon expire.

[Note to realtors: We are likely the exception to the rule, but, attempting to instill a sense of urgency will forever preclude our doing business with you.]

Sometimes I feel sorry for these people.

As was typical yesterday, a sales agent got the best of all possible answers from the standard queries - we sold our California home years ago and we now rent in the area, looking to buy - and must have felt flush with desire for a quick sale, spurring memories of a bygone era.

We probably should've told her that we definitely won't be buying anything for at least another nine or 10 months, perhaps much longer, and it may not be here.

But we didn't. We just said thank you.

Comments

[j-dub:]

This web site keeps ignoring record spamming, crashing integrity and huge boneheads. :)

good reasons for 4 ending this pimple popper's fun
On Oct 22 06:23 PM From_MIT wrote:

> This market keeps ignoring record unemployment, crashing dollar and
> huge deficits.
>
> good articles 4 slow news day: tinyurl.com/finance-ar...
>
>
> Goldman & Ben run the market

Oct 22 07:18 PM

[Tony Petroski:]

Mr. Iacono:

"Proponents would like to see the program extended well into next year and have the credit expanded to $15,000 (or more),"

Yes, more. $25,000 would do me good but $100,000 would be even better.

Also from Mr. Iacono,

"Just once it would be nice to hear some policymaker or some real estate industry professional say that, in order for the economy to stabilize, home prices must revert to more normal levels - say, levels that are supported by wages or incomes - rather than the familiar refrain that home prices must simply stop falling."

OK. I'm speaking for the Real Estate industry: Home prices must revert to normal levels so, say, the average Joe can afford them.

Done.

Now let's get on making our next fortune.

Oct 22 07:19 PM

[fwi:]

I f the current real estate model only works with government propping up prices with too low interest rates, too low downpayments, and large credits of $8000 and maybe $15,000, then the model is broken.

I t appalls me that real estate professionals believe that the only way their industry can survive is with the government spending tens of billions of dollars (it does not have by the way). They know better: when prices fall enough , buyers come in of their own accord and they don't need the government to nanny-broker the deal.

Are teenagers running this country now? What a mess.

Oct 22 07:38 PM

[La Marque:]

Use the 'Report abuse' link. I just thumb down every post with the spam.


On Oct 22 07:18 PM j-dub wrote:

> This web site keeps ignoring record spamming, crashing integrity
> and huge boneheads. :)
>
> good reasons for 4 ending this pimple popper's fun
> On Oct 22 06:23 PM From_MIT wrote:

Oct 22 09:58 PM

[Windsun33:]

This administration and congress seems to be totally clueless about economic facts of life. Perhaps they all missed the part about supply and demand in 9th grade.

Here in Phoenix, house prices are predicted to drop yet another 23%, on top of an already 54% drop over the past two years. So I take a $15,000 credit on a new $200,000 house.

Now, it is 2010 - in one year it is going to be worth $154,000. So I will end up underwater by some $30,000, I have ripped of the taxpayers for $15,000, and the house will go into foreclosure next week. Yet this is what the politicians seem to be pushing.

Am I the only one that sees something wrong with this picture?

Oct 22 10:46 PM

[Nettligent:]

Never trust anything from crooks: National Association of Realtors and the National Association of Home Builders.

Oct 23 04:57 AM

[datadave:]

I agree that the realtors and larger homebuilders are often crooks and exploiters, but the real beneficiary of increased home prices and inflated debt is of course the privileged elite sector, the financial sector. Over 40 percent of all profits in the USA during this decade go to the financial sector (Simon Johnson) and from whom and what do they derive that money? from our debt. Most households owe on their homes more than in anything else. The financials need home ownership and mortgages to prop up their bottom lines and who else is either the Bush or Obama regimes more representative of than the Financial Sector?

Oct 23 05:45 AM

[LilySpin:]

right now tax credits and low mortgage rates are making homes more affordable, in line with HAMP and other government programs aimed at keeping Americans in their homes (and encouraging first-time buyers to go for it). this whole effort is to extend the foreclosures, vacant houses, and short sales over a longer period of time in hopes that the job market can gain enough strength to withstand -- and perhaps mediate -- the rest of the housing market correction... so when you mention that houses that were cheap with these temporary policies will be "prohibitively" expensive, keep in mind the unemployment stats, work hours, and wage cuts in the current environment. it's optimistic, yes, but theoretically that house will not be "prohbitively" expensive because the American consumer will have more money.
(of course taxes will take an enormous bite out of disposable income... so perhaps tax credits will continue to be a popular government intervention in the housing market.)

Oct 23 10:05 AM

[Fabien Hug:]

If they expend it to $ 15,000, all those who rushed to buy with a $ 8,000 tax credit are right away short with $ 7,000. That was a good deal. As Mr. Petrosky suggested, I'm waiting for a $ 25,000 tax credit before I buy, $ 100,000 would be too much. Let's not be greedy.

Oct 23 10:06 AM

[The Hammer:]

Nettligent you nailed it. These real estate whores would bankrupt the country first before considering doing whats right.
These organizarions have 0 credibility. Housing is way overrated as an economic engine for growth. how does it make our country more competitive? The bloodsucking subsidies need to end now.

Oct 23 11:09 AM

[MarkitWacha:]

Here's how to profit from a govt. with no business sense:

Long: commodities, via DBC
short: treasuries, via TBT

Obama is the poster boy for the financial sector. He rubber stamps every government giveaway.

Oct 23 02:15 PM

[goldbug101:]

What this tells me most likely occurred is this:

(1) Parents "sell" their house to their 4 year old child, neice or nephew for the outstanding balance of their mortgage (or maybe more to pocket even more $$??)

(2) Child qualifies as not having owned a house in the last 3 years

(3) Parents continue to live in their child's home and support and maintain the house

(4) Parents file for and receive $8,000 tax credit, most likely claiming child as a dependant as well, plus any money they pocketed from the "sale" of their house (owed $115k, sold for $150k, pocketed the approx. $35k from the sale plus the $8k trx credit

(5) Oh yeah - parents get to exclude the capital gains on their "sale" of the house since the have lived there at least 3 out of the last 5 years!

It might have happened the way you say, or it might have happened as laid out above. That is why a 4 year old claiming the credit reeks of potential abuse.


On Oct 22 04:49 PM optionsgirl wrote:

> I don't understand the part about the 4 year old. Is it illegal for
> a four year old to own assets? No. Does a 4 year old with sufficient
> assets have to file a tax return? Yes. Is it illegal for a 4 year
> old to purchase property? No. My understanding is a minor may purchase
> property but a contract a minor signs isn't enforceable. Therefore,
> the minor's fiduciary would sign the contract ( most likely a parent,
> guardian, trustee, etc.). So, what is it about the 4 year old that
> makes it illegal for the tyke to take the tax credit?

Oct 23 03:03 PM

[ETRADERVIC:]

I personally know 2 first time home buyers who have availed themselves of the 8K. This is probably one of the more innocuous policies compared to the huge blunders that have already transpired.
The real question is the money that the Government has wasted in its bailouts without providing any value to the homeowner. Also, the Feds purchasing of Mortgage Securities has mitigated market risk and has kept mortgage rates low. At some point they will cease that activity, the resulting increase in rates will be a second body blow to the housing market.

Oct 24 09:23 AM

[optionsgirl:]

Thanks for taking the time to share your slant on it. That still doesn't sound like fraud to me. Fraud is doing something illegal. None of that sounds illegal, only opportunistic. I realize I am getting a lot of "thumbs down" for my observation. (I don't care, vote away; better to see both sides of an argument than be blinded by your particular convictions.)
Here is my underlying sentiment:
It will always be in the best interest of business and astute individuals to find the loop holes and exploit them. If government wasn't so busy orchestrating this crap, there would be no loop holes to exploit.


On Oct 23 03:03 PM goldbug101 wrote:

> What this tells me most likely occurred is this:
>
> (1) Parents "sell" their house to their 4 year old child, neice or
> nephew for the outstanding balance of their mortgage (or maybe more
> to pocket even more $$??)
>
> (2) Child qualifies as not having owned a house in the last 3 years
>
>
> (3) Parents continue to live in their child's home and support and
> maintain the house
>
> (4) Parents file for and receive $8,000 tax credit, most likely claiming
> child as a dependant as well, plus any money they pocketed from the
> "sale" of their house (owed $115k, sold for $150k, pocketed the approx.
> $35k from the sale plus the $8k trx credit
>
> (5) Oh yeah - parents get to exclude the capital gains on their "sale"
> of the house since the have lived there at least 3 out of the last
> 5 years!
>
> It might have happened the way you say, or it might have happened
> as laid out above. That is why a 4 year old claiming the credit reeks
> of potential abuse.

Oct 25 09:36 AM

[FloridaBoy2:]

Thanks for the article but you are way off base. The tax credit is an incentive to buy and absorb inventory. It must be paid back. I'm sure
the *realtors* are fully explaining this. A 30 year loan @ 5%
is going to look like a smart move in 5 years.

www.irs.ustreas.gov/ne...

I am in SW Florida and it is now cheaper to buy than to rent. Depending on the market, now is a good time to buy. Do your due dilligence. If a realtor starts making future price predictions file a complaint. Do not close until the contract is reviewed by a real estate attorney. If it is a newer home, have a home inspection done by a party you choose. The homes built by the largest builders are generally poorly/cheaply built. Make sure there is no Chinese drywall.

Oct 25 09:52 AM

[sorsorday:]

The 4 year old's income must come from somewhere, so either the 4 year old needs to pay the tax on that (which probably exceeds the 8000 tax credit) to admit he/she has the income or he/she cannot claim the tax credit because his/her income does not exist.

p.s. if the house is sold by his/her parent, he/she cannot claim the credit either. It's specified that the house cannot be sold by relatives in the rule.

On Oct 22 04:49 PM optionsgirl wrote:

> I don't understand the part about the 4 year old. Is it illegal for
> a four year old to own assets? No. Does a 4 year old with sufficient
> assets have to file a tax return? Yes. Is it illegal for a 4 year
> old to purchase property? No. My understanding is a minor may purchase
> property but a contract a minor signs isn't enforceable. Therefore,
> the minor's fiduciary would sign the contract ( most likely a parent,
> guardian, trustee, etc.). So, what is it about the 4 year old that
> makes it illegal for the tyke to take the tax credit?

Oct 27 04:08 AM

[3rd worlder:]

Tax credit? What credit? People who used it claim that you get a 1099 at the end of the year for $8,000. That

Oct 27 06:56 AM

[User 464342:]

The tax credit must die. It is not creating momentum; it is creating dependence and inflating the bubble again. That kind of “help” was what got us in trouble in the first place.

It is stopping the needed correction in house prices. House prices were getting closer to affordable levels were free market was going to sustain them, now they are being hold artificially high.

As the NAR put it, the tax credit creates a ripple effect in the economy, and because it will have to expire eventually, the ripple effect will hurt the economy worst than the clunkers did. Extending it and expanding it will only make it worst when finally gone.

Oct 27 03:44 PM

[michaelschn:]

I would put this simpler:
US housing market is a drugs addict. It's on several drugs for decades:
1. Government backing of FMA, FRM etc., which had relieved them from any meaningful reserve requirements.

2. Various tax deductions.

3. Artificially low interest rates. (We pay for them with the inflation tax.)

Now the addict had tried a new narcotic: tax credit. The first shot turned out to be not very efficient. The addict gets high by 1%, while we refund 2%-3% of the average purchase price. But the addict liked it nevertheless. He wants more. No wonder he needs higher doses to go high. Now he asks for about double dose and IV administered. OK, this time it will cost us "only" tens of billions, but our addict will need more and more of it.

In any case the cost we pay to support this junkie is outrageous. Not enough that we pay about third of our income for housing, but much of our taxes (both collected and inflation taxes) go to support it. Compare this to what we spend for
1. Food;
2. Energy;
3. Healthcare;
4. Education.

Each item on this list is at least as important as housing, is scarcer and/or more difficult to produce.

Oct 27 05:54 PM

[User 494853:]

Well put. The real problem here, aside from the governments foolhardy intervention any way, is that the whole real estate sales industry can only profit through false propaganda. That is, NAR only makes money through dues, agents only pay dues if they are making money, agents only make money when they are closing sales, and sales only close (in any appreciable volume) in a NON declining market. So of course NAR and the agents are going to do everything in their power to convince people the market is recovering. Somehow the real estate sales industry has been transformed from a consumer oriented service industry to a profit hungry machine with no long term concern. Sound familiar - it should - and don't expect the housing market to recover any time soon.

Nov 05 02:38 PM