Realty Check

Home Buyer Tax Credit Done: Does it Matter?

Despite all the yelling about the need for a government exit strategy from its massive economic bailouts, real estate welfare is still cooking with gas.


Last night the Senate voted cloture on a bill that includes the extension of the first time home buyer tax credit.

While this is not the final vote, it effectively seals the deal on the plan to extend the $8000 first time buyer credit through April 30th and expand said credit to move-up buyers on a smaller ($6500) scale.

On top of that, Congress already extended the higher GSE/FHA loan limits that were put in place to help more buyers take advantage of lower mortgage rates. And then there's the "Net Operating Loss" carryback extension, which I blogged about previously, and which will add more cash to the coffers of the nation's home builders.

Add it all up and it's another big vat o' juice for the U.S. housing market. Or is it?

Builders themselves say they are more likely to hold on to that NOL cash than to invest it in new jobs or new homes. And as for the tax credit extension, industry estimates are that this year's first time home buyer tax credit added 350,000 home buyers to the market who otherwise would not have purchased homes. These buyers were almost entirely on the low end of the market. 70 percent of home sales in September were of homes under $250,000.

Let's do a little math here, shall we?

A few weeks ago the Deputy Commissioner for Services and Enforcement at the IRS, Linda E. Stiff, testified before Congress that between January 2009 and September 2009 the IRS has processed claims from more than 1.5 million individuals or families who have purchased homes. So 350,000 is a little over 23 percent of 1.5 million. That says that at least 70 percent of buyers would have bought their homes without said credit.

I'm not saying the boost wasn't important, and we already see a bump up in pending home sales, showing a lot of folks trying to get in under the wire of when they thought the tax credit was going to expire (Nov. 30, 2009), so I have to wonder about how much "demand" has been pulled forward from the future into this year because of the bonus credit, and therefore how much more of a boost are we going to get from the extension.

Now granted, the extension is also an expansion, giving some move up buyers $6500 more in purchasing power, but that's only up to the income cap of $150,000 for single filers and $225,000 for joint filers...again, covering an awful lot of Americans, but not everyone.

So where am I going with all this?

I still think we're creating a bifurcated recovery. I understand that much of the pain in the housing market is on the low end, where foreclosures rule, and that's where we need to do the bulk of the cleanup work. But I don't think we're paying enough attention to the move up market, and I don't mean the million dollar market, I mean the homes between $250,000 and $500,000. This sector is being hit hard by unemployment, and will inevitably be the new wave of homes going into foreclosure, because they can't sell.

I'm also wondering how much the tax credit extension is going to help, seeing as it doesn't extend through the most critical season in the housing market. Contracts must be signed by April 30th, yes, they can close by June 30th, but that means the tax credit is ending just as the Spring season is beginning. I'm not taking any side on government intervention today, but if you're going to do it, then do it. This extension is sort of like offering cheap snow boots in July.

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