The U.S. Senate won’t vote until next week at the earliest on proposals to extend both an $8,000 tax credit for first-time home buyers and unemployment benefits for the nation’s jobless. The administration endorses an extension. Lawmakers announced plans earlier this week to attach the tax-credit proposal to a pending bill on the unemployment benefits. The $8,000 credit, enacted earlier this year as part of the $787 billion economic stimulus package, is set to expire at the end of November.
The lawmakers want to extend the credit until April 30. Their proposal would also expand it to allow higher-income Americans and some who already own homes to qualify for the break.
Home owners who have lived in their prior residences for at least five years may receive a credit of $6,500 under the plan, said Senate Finance Committee Chairman Max Bucas. Also, couples earning as much as $225,000 and individuals as much as $125,000 would qualify for the extended break, Baucus said. That’s up from a $75,000 limit for individuals and $150,000 for couples.
“The success of the American economy is closely tied to the success of the housing market; by helping to stabilize the housing market, the home buyer credit has helped to shore up the economy as it begins to recover,” said Baucus, a Montana Democrat. “This would enable an even greater number of potential home purchasers to take the credit.”
The estimated number of homes that would be bought if the benefit is extended through 2010 is 5 million homes. At $8k per purchaser, the extended time-line would in effect increase the deficit another $40 billion. At the expanded amount requested by the NAHB, the cost would be $75 billion. The cost of this expansion and extension, spread among tax-paying homeowners is estimated by some economic watch-dogs as being more than $150,000 per household.
On a positive note:
For housing market stability and recovery… the benefit has, at the very least, increased sales. However, the credit income cap is only helping the lower end of the market. Low-end sales have been red-hot. In some markets there is actually a selection shortage and many first-timers are being outbid by investors paying cash. To open up more inventory, outside of banks releasing foreclosed inventory, the tax credit would have to do at least part of what the NAHB suggests. Namely, give homeowners an incentive to move-up and out by removal of income caps and extension to include the purchase of any principal residence.
NAR has been asking its members to voice their support of the expansion and extension of the credit. They said in a press release last week that every home purchased by way of the tax credit “pumps” nearly “$63,000 – the equivalent of one new job” into the economy.
Despite advocates touting the ‘stimulating’ benefits, there are other issues being kept in the closet:
* Basic supply and demand economics means that an extension in the credit will bring another depression in home prices after the credit ends. Demand for low-end housing was increased by this benefit. This demand, although also inflated by investor interest, caused homes prices in this sector to go up. However, when the it ends, the tides will turn. There will be no mortgage products or incentives for marginal buyers, and rental rates will start to seem more affordable than mortgage payments again. To compete, home prices will drop.
* Default rates for these buyers are bound to be high. Most are purchasing homes using this benefit as a down-payment and who otherwise have not proven that they can save for or afford a home.
* The has also is giving people who should remain renting reason to become homeowners. Now, rental property vacancy rates are rising and rents are further depressed. For commercial real estate, this just means more defaults and foreclosures at exponentially greater losses to lenders. Bailout for those foreclosures will mean much more of a loss to tax-payers than the cost of the tax credit. Vacancy rates in apartments are already greater than in the early 90’s and value losses are estimated to reach 45% by next year, according to Fed economist, Mr. Conway.
As the debate continues… Our prediction is that the tax credit will be extended into 2010. Failure to do so would be political suicide. The income caps, principal residence restrictions, or tax credit amount changes, are remain to be seen… We will continue to watch reaction and detail any policy changes.
I welcome your comments and questions…