First-Time Home Buyer Tax Credit May Be Flaw

Buyers are racing to take advantage of The Worker, Homeownership, and Business Assistance Act of 2009. Additionally, President Obama has extended the first time homebuyer tax credit which is part of the American Recovery and Reinvestment Act of 2009. The new time frame is November 7, 2009 to April 30, 2009 (Realtor). After the success of the first part of the tax credit for first time homebuyers, people were pushing for an extension of the date to allow more people to qualify for the credit. It refers to first time homebuyers and homeowners who have occupied their residence for 5 years in the past 8 years (Realtor).

The first time buyers will receive up to an $8,000 tax credit (U.S. News). They have until May 1, 2010 to have signed a sales contract and have until the end of June to close the transaction (U.S. News). The first part of the credit had specified that they had to close before November 30, 2009, not giving those who haven’t found a house yet a loss of opportunity if they didn’t fine one by late October. The new extension raised the annual limit incomes up to $125,000 for singles and $225,000 for couples (U.S. News).

Homeowners have the opportunity to get a tax credit if they have lived in their home for 5 years in the past 8 years and will receive up to a $6,500 tax credit (U.S. News). Now with more additions to the act, there are plenty of people who qualify for the tax credit. The home being purchased must be the primary residence and be up to $800,000 (U.S. News). The tax credit is calculated by the owner’s income and the purchase price of the home (Realtor). The tax credit doesn’t need to be paid back if the owner lives in it for three or more years after, if owner sells it before three year, then they will have to pay it back (Realtor). Now is the perfect time to be a part of the American dream in purchasing a home with a great incentive from the government, but is this really helping the economy?

The National Association of Realtors asserts that the tax credit has created 350,000 new transactions; however, the calculated risk blog estimate that the US government is paying $43,000 for every house that is being sold. This means $43,000 going back into people’s pockets rather than being invested, creating a non-stimulative effect. The government expects buyers to spend the money in their pocket but stimulus measure shows that this is but a low multiplier (the ratio of new economic activity to stimulus payments). Instead of putting money back into people’s pocket, this money can be use in other ways to increase economic performance.

The tax credit does not stabilize the housing market, it keep housing prices artificially high. It boosts the price of a transaction that would have happened anyway without the tax credit, which only quickens the process and creates additional transactions. This means with the tax credit, a person is able to afford a house, but when the tax credit disappears, the person will be unable to pay for the home and the house price will fall. Therefore the tax credit is a method of making creating temporarily affordable homes, that otherwise would not be affordable; this can lead to many problems. (Brookings)

For example, a tax credit that alters individuals from renting to owning drives up the price of houses while driving down the price of renting. Another example would be that through subsidizing home purchases, the government is assisting banks that possess portfolios of foreclosed houses but hurting other banks which possess commercial real estate portfolios.
Overall, there is a better way to spend the money used in the tax credit. The tax credit aims to be available to all home buyers, however, it should restrict credit to individuals buying foreclosed homes, who would have not afford it without the tax credit, resulting in future default risk if ever the tax credit plummet. The government should consider investing that same money into programs that convert foreclosed properties into rentals to sustain an income. From 1998 to 2008, the rate of homeownership raised from 66.4% to 67.5% meanwhile the real average household wages fell to $50, 300 from $51, 300, a loss of $1000. The extreme effect of artificially high house prices with the decreasing of income creates inflated home values, which will not last long. (Brookings)

Alyssa Katz in her book, Our Lot, which discusses the rise and fall of the American Dream and the government financial engineering, states "Scholars found that once they set aside the various traits that tend to determine whether someone chooses to own or rent one's home, homeowners and tenants really aren't that different. . . . Often the new homebuyers were purchasing the worst housing in the worst neighborhoods with the worst schools -- hardly a solid investment."
Overall, our tax credit policy will suffer from the design that shifting the level of worth on existing housing can provide a net benefit to society; because sales of houses are in essence zero sum transactions. Therefore, changing the price level is purely redistributive because the tax credit is attempting to smooth out inevitable downward adjustment which the economy is facing by spending even more money.


References:
http://www.realtor.org/home_buyers_and_sellers/2009_first_time_home_buyer_tax_credit

http://www.usnews.com/money/blogs/the-home-front/2009/11/06/expanded-first-time-home-buyer-tax-credit-becomes-law.html

http://www.brookings.edu/opinions/2009/1009_homebuyer_gayer.aspx