Wednesday, February 04, 2009

$15,000 Home Buyer Tax Credit

by Osman Parvez
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Not only is the Senate GOP pushing for a 4% mortgage rate program in the latest stimulus bill, they're adding a tax credit of up to $15,000 for home buyers. Will it pass?

From the NYT:
But Senator Johnny Isakson, Republican of Georgia, a former real estate broker, who was the prime sponsor of the home buyer credit, said it was modeled after a similar, $2,000 home buyer incentive that helped lead the country out of recession in 1975.

“We do have a history in this country with housing and it goes back to the crash of 1974, which actually in terms of inventory and price declines was comparable to what’s happening now,” Mr. Isakson said at a news conference.
“Within one year of the inception of that tax credit, two-thirds of the available inventory that was on the market was gone. The market moved back to a balanced inventory, values stabilized and things became very healthy. The only reason I know all of that is I was selling houses in 1974, that’s what I was doing to feed my family and make a living.”
The tax credit would give buyers 10 percent of the price of a primary residence bought within one year, up to $15,000, and is intended to stabilize plummeting home prices, which caused a wave of foreclosures and led to the near collapse of the financial system as Wall Street firms wrote down billions in mortgage-backed assets.


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7 comments:

  1. Tax cuts are generally a good thing, especially if followed up with budget cuts. However, the housing industry already has a huge incentive with the mortgage interest tax deduction. The mortgage interest tax deduction rewards greater consumer debt into a non-productive asset (housing).

    Why not promote productive savings by lowering the corporate tax rate and eliminating the capital gains tax instead? Congress has everything backward. Congress also hasn't taken any responsibility for the mess we are in.

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  2. Let prices fall. Revert to the mean - 2-5% YOY price increases. We have some room to fall, still, in order to get back to the historic norm for appreciation. Home owners and realtors, and now everyone else because the financial industry has made it everyone's problem, may bitch and moan, but "what goes up". I find all of this quite absurd, this rush to "stabilize" the housing market. Where were the calls for "stabilization" when the slope of the curve was positive? Now it is the same slope, in a negative direction, and the few (homeowners, politicians, bankers) are demanding that the many (all the rest of us) pony up the dough to alleviate the pain from their irrational exuberance and shortsighted greed. It's quite unfair, quite absurd, and quite unjust. I believe, irregardless of any maneuvering the govn't may try, prices will reach the historic norms, and all this money will have been wasted. And here's a bone to chew on - those that have lost anbd will lose their jobs, how will a 15K credit benefit them? Many of those this would help, first time homebuyers with no home to sell in order to buy, are the first to be laid off.

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  3. Linton - You've may have a point, but lowering the cap gains tax is politically risky because it looks like a handout to the wealthy. 15% cap gains tax is also already a historic low. I don't think cap gains in inhibiting investment, it's massive deleveraging and declining asset values that's inhibiting investment.

    nf - housing is a major contributor to the crisis. Stabilizing prices in markets that are plunging in value by providing incentives to qualified buyers makes a lot of sense.

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  4. Litton & nf, great calls! Obviously Osman wants to pull levers thinking that he can out smart the market with price controls, which would prolong the pain at the very least.

    The mortgage interest deduction alone has pumped prices higher making it harder for average Americans to aford homes.

    Corp. tax cuts and 0 Cap. gains, would show huge investment in the USA, as the rest of the world searches for safe investment. We are completely uncompetitive in these categories right now.

    I like Obama, but he clearly doesn't get it. Here comes a lost decade, oh how we never learn from history.

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  5. Here's an incentive - got jobs?

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  6. Understatement of the decade, Osman. Housing is certainly the issue. However, my argument is simply that equilibrium will find its way into the market with or without govn't interference. Job losses certainly indicate that "quialified buyers" are becoming scarce, and therefore incentives will not work in the magnitude that is necessary to stop prices from falling. It may slow them down, or cause a temporary surge in sales, but if the job market continues the current trend, it will not matter in the long run. They need to fall, and they will.

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  7. Beating a dead horse:

    "The government shouldn’t be in the business of trying to inflate housing prices artificially. As I’ve discussed here before, pushing up prices just reduces affordability and promotes more overbuilding. "

    - Edward L. Glaeser is an economics professor at Harvard. From NYT Subsidizing Home Buying...

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