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The $8,000 Tax Credit for New Home Buyers: Good or Bad? July 21, 2009

Posted by John Watch in News Feed.
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The $8,000 tax credit for new home buyers; good or bad?

An article from biggerpockets.com “A Government Program That Works?” discusses the $8,000 first-time homeowner’s tax credit and the effect it has had on the housing market.

“The idea of the tax credit was to provide an incentive to buy a home which would, in turn, stimulate the housing industry and the economy as a whole.”

 “This [November 30] deadline has created a rush by builders to have homes completed in time for buyers to qualify for the incentive. The most recent housing numbers bear this out. New home construction in June reached its highest level in seven months. Granted these numbers are still way below the peak of recent years, but it is still moving in the right direction.”

 Public records show that $8,000 tax credit has injected a quick jolt into the housing market, permitting new buyers an additional source of funds to acquire a home.  Although generating revenue is vital to economic recovery, additional building onto the housing market’s frail foundation could send us backwards.  

  •  A report by AccuriZ.com entitled ‘Housing in Crisis,’ presents some key factors that attributed to housing boom and its subsequent bust:
  •  Increased home construction since 2000, especially in the key states (FL, NV, AZ, CA, GA) resulting in over 4 million new housing units without any demand.
  • Increase in house sizes from 1,700 square feet to 2,200 square feet from 1996 to 2006. Property value growth was in large part of result of this (30% over value growth), yet the homeowner only saw property values growing at 10% to 20% per year and thought we better buy now.

As time progresses and more property data is available, it will be interesting to see what emerges from the government’s efforts (including the tax credit).   So far, the patterns arising are similar to the key factors of the housing crisis mentioned in the AccuriZ report:

  • Housing starts are stabilizing, but excess supply will hold development in check for several years.
  • Mortgage rates continue to be historically low, permitting new home buyers to lock into fixed rates, not adjustable rate products. (Article)

Here’s an excerpt from a nytimes.com article on housing starts:

Some analysts said low mortgage rates during the spring and federal tax credits for homebuyers played a role in fueling the demand for new housing.

 “New home buyers have been helped into the market,” said Celia Chen, a housing economist at Moody’s Economy.com. “I think they’re building in advance of when that tax credit expires.”

Yet the horizon is still dark, “..adding to the housing difficulties, builders, especially of condominiums and apartments, are continuing to struggle to find financing.”

 The government is proactive in restoring confidence to consumers, but the housing crisis will take months to stabilize and years to recover with the total absorption of existing housing units not expected for another two to three years.

 Another solution can be assistance in the Foreclosure process as reported by Kathy Tyson of Banks.com  “A Viable Homeowner Bailout”.  ……

• Mr. and Mrs. ZZZZZ have a mortgage payment of $1,170 ($200,000 loan with 30 year payout at 5.75% interest).
• The ZZZZ’s lose their job and can only pay $470, so the government pays the difference of $700
• So the ZZZZ’s remain homeowners and work through their problem. It takes the ZZZZ’s 10 months to get back on their feet, the government paid out $7,000 and now the ZZZZ’s owe the government.
• But the government says okay, you can start paying us back in seven years and the payment will be over 10 years at an interest rate of 3%.

He added,

This program is not perfect, but it can assist a lot of people who want to own homes. Most importantly, it is channeled directly to the property owner, not a large corporation that has other motives besides keeping the property owner solvent.

“I can see how this will help homeowners today.  I think of my friend and her family who’ve been unemployed for a year now and know they could easily come up with a house payment of $500 instead of the $900 they are paying now.  If they had two years of help (capped at $50,000 as suggested in the post), they’d be that far ahead still on their own home and could start paying back when they get back on their feet – the seven year delay to start paying back is genius.”

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