Is the Benefit of the Housing Tax Credit Overstated
Posted: Wednesday, November 04, 2009
by Jim Johnson
Metropolitan Mortgage
If the credit could be applied the down payment this would make more sense.
- Many think the credits benefit is exaggerated. Instead I ask which comes first the mortgage or the down payment? Congress is close to extending the credit. In fact they are considering extending the credit to existing home owners. That new credit would be up to $6500. But that might not work because many of those buyers are locked into a home that has lost value and may not be salable right now. If that credit is allowed for investment property then you might again accelerate sales. The senate has proposed the extension of the $8000 first time buyer's credit until April 30, 2010. If the credit is extended over the winter just how much will it affect sales? That is the slow time of the year for real estate. Will the credit improve sales at the slowest time of the year? Does the credit simply accelerate purchases that were going to take place anyway? That was the criticism of the "Cash for Clunkers" program. I think that the cash for clunkers was a major bust. Most of the cars purchased were foreign made. It really didn't help domestic production.
- The way the first time buyer's credit is set up really doesn't help create sales. The only way it could do that would be to have the credit function as the down payment. Consider this: To buy a big ticket item you have to save up the down payment. Most of the users of the credit are using FHA mortgages. The FHA mortgage requires a 3.5% down payment. There are 2 valid schools of thought here. One thought is that in order for the buyer to value the home they need "skin in the game". By that they mean money out of their own pockets. The other idea of stimulating the economy wants to create home sales. If you allowed the tax credit to be used as part of the down payment I think you would actually create sales. The trick is the mechanism used to equate the credit into the down payment. Since the credit is refundable that should be easy. By refundable I mean you can get the credit even if you didn't pay any taxes. Since the credit exists many FHA mortgage applicants are getting "Gifts" from family members. I think that many of these gifts will be repaid from the tax credits, I don't want to look in that horse's mouth.
- OK we have had 4 months in a row of increasing home sales. Is that connected to the credit? Nobody knows. "Failure to act now could derail the fragile housing recovery even before it takes root," said Jerry Howard of the National Association of Home Builders. He said this to congress Wednesday urging them to stretch the tax credit out even longer than presently considered. Howard estimates that the credit has helped to create 200,000 jobs, helped drive home sales up, stem foreclosures and stabilize prices. I will just bet he thinks the credit is better than hot and clod running water too. Howard's claims seem exaggerated to me. Some economists think as I do that the credit's impact is overstate.
- Recently a report was released stating that a huge amount of fraud was connected to the credit. I question the timing of the release of this report. I also think the government's incompetence is the real problem. If the federal government can't run the economy, social security, Medicare, Medicaid or the VA hospitals what makes everyone thing they can run this? I will not go off on a rant about government incompetence but really think about this in that light.
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Top-level comments on this article: (4 total)Anything that increases the way that people feel about the state of the economy is very much welcome at this time. People need to be encouraged to start getting involved to bring the country out of the current slump.Thank you for the read of my article. Look for the next one. There are millions od ARM's set to adjust over the next 2 years. That will stall the economy and delay recovery.
Thanks for writing this piece. We chose to pay off our mortgage and not get the "write off" - when you are in the lower tax brackets you really aren't getting that much "cash in hand" with the write off. Just after we paid it off (with a small inheritance) the stock market DROPPED and we would have lost at least half - now the house is paid for and we feel relieved. MarijoThank you for reading my article. Good luck to you.
Jim, I did not know much about this tax credit, so I found the information in your article interesting. I find it disturbing that this "tax credit" might go to people who do not pay taxes. In that situation, it seems that the "tax credit" is really a gift from the taxpayers. Do taxpayers really want to hand out $8,000 or any amount to some non-tax paying home buyer? How do you stop these "credits" once they start? What about all the people who already own homes who did not receive a start-up credit. It seems like this credit is a slippery slope even in hard economic times.I ran a tax preparation business for 25 years. You might be shocked to know that 41% of working people do not pay any taxes. Your government is trying to push that to 51%. This is so the liberal government will have a built in majority and run the US forever. This is a fact. Thank you for reading my article and look for the next one on millions ARM's set to adjust and how that will keep the economy from recovering.Thank you Jim. With your experience, you definitely have an informed perspective. I will look for your next artice. Have a great weekend.
Jim, good article. I only wish that the government would help the existing homeowner with the taxes (reassess) so that the market will stop being filled with foreclosures. It's like a dog chasing its tail. Take careIf you are actually making your payments the government will say - so what. Until the economy gets better the foreclosures will continue. Look for my next article about the millions of ARM's set to adjust and what they will do to the economy. Thank you for reading my article.
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