Reflections on the Proposed Homebuyers Tax Credit

Earlier this week, the U.S. Senate approved an amendment to the proposed economic stimulus plan that is of particular interest in the real estate community. The Liberman-Isakson Amendment, as proposed, would extend and broaden last years first time home buyers tax credit. (Keep in mind that the Senate has not yet voted on the bill; the House still has to agree, and the President must sign the law before it might take effect.)

Here are the essential points as proposed:

• Home Buyers will receive a pure tax credit (a reduction of the taxes otherwise owed)
• The credit would be 10% of the purchase price, up to $15,000.00.
• Provided that the home purchased becomes the buyers primary residence, for at least two years
  
• You can only use the tax credit one time.
• If the home is purchased in the first year this law exists, you can elect to take the credit as if the house was purchased on December 31, 2008 (that is, the credit can be applied on 2008 returns.
• Or, if a home buyer prefers, the credit can be split between two tax years. This could help some taxpayers who do not earn enough to pay more than $7500 in income taxes a year (the amount owed by a typical family of four who earn about $92,125)
  

So what is different from the current credit?

• The credit is no longer limited to first time home buyers
• The credit has doubled in size
• The credit no longer carries the five year repayment limitation (but again, there is a two year recapture period if the house is sold or the buyer does not move in)

The home buyer's tax credit is not a new idea. Senator Isakson based this proposal on a similar $2,000 credit that was offered to taxpayers in recession-plagued 1975. Proponents claim that within one year of enacting that stimulus credit, real estate prices stabilized and two-thirds of the then available home inventory was purchased.

So, whats not to like?

At this point, we need all the help we can get, in stabilizing declining home values, stemming the flood of repossessions and restarting the markets. Anything that makes buying easier (or at least more advantageous); anything that makes people feel better about spending large sums of money, from precious savings amid all this uncertainty; anything that reassures citizens and investors who are fearful of further erosion of their economic well being is welcome.

The market needs a shot to bolster consumer confidence and large tax credits like this are a terrific start.

But this proposal is hardly a panacea and must be understood for what it really is. Consider:

• According to an article in yesterday's New York Times, the proposed tax credit will cost us all about $18.5 billion dollars
• Bloomberg is reporting that a family of four earning about $122,000 would completely wipe out the income taxes they would otherwise owe this year if they bought a house, but a family earning half that amount would get about $2,300 less in tax benefits for buying a home than they would under current law.
• Lower-income people whose taxes over two years don’t total $15,000 won’t get the full benefit and in many cases would get a better deal under current law, which requires the government to send a check for the difference between taxes paid and the $7,500 credit.
• There is some suggestion (i have not been able to fully verify this yet) that this credit might only apply to homes purchased with a minimum down payment of 5% or more of the purchase price. If so, this will likely exclude home buyer who utilize a VA, FHA or Rural Development mortgage programs.
• FHA guaranteed loans are getting harder to come by. Some FHA backed lenders are imposing lending standards that are far stricter than the government's "minimum" lending guidelines.
  
• Mortgage lenders are still being extremely tight fisted in making purchase money mortgage loans. Buyers must have strong credit scores, and generally speaking must be prepared to make hefty down payments (20%) for their homes. Given that last years stock market collapse halved most savings and investments, and as it gets tougher to pay bills, it is hard to imagine how many homeowners people can still qualify for Fannie Mae & Freddie Mac financing.
• Then once home buyers start looking for new homes, keep in mind that Fannie & Freddie are imposing new fees and pricing for condo buyers. The credit will help, but the closing costs will hinder.
• Finally, as the tax credit stimulates buyers to get back into the market, they are going to want to look at new construction products. That segment of the industry is suffering the effects of over-supply. This credit is likely to spur builders to start constructing even more new homes, which will (i suspect) aggravate or at least extend this problem.
  

The net effect? It seems to me that this is more of the same, it terms of what we are already seeing in the real estate markets. This tax credit is going to benefit the most financially secure amongst us. By and large, I suspect limits the benefit to the upper classes, and perhaps the most disciplined and fiscally conservative parts of the middle class. Wouldn't these folks pretty much be expected buy homes if they wanted to anyway? with or without the tax credit? Those who are the best able to afford new homes (and who already have capitalized on recent mortgage interest rate dips) are going to be winners. The folks who are on the margins, people with lower credit scores or who have lost larger portions of their accumulated savings are likely to miss out. The rich will indeed almost certainly richer.

Overall, I still support this tax credit. The prime objective has got to be an effort to kick start real estate sales, without regard for who is buying. BUT, fixing the market will require a much broader commitment to supporting people trying to stay in their existing homes and mortgages, and helping solve housing problems for people who can no longer qualify for conventional or FHA guaranteed loans.