Home buyer tax credit getting praise, flak

New Media editor Don Fenley casts a big net for hidden gems about and behind the news

Published Tuesday, September 22 2009 - (1) Comments

Will it be more economic stimulus or conservative fiscal philosophy? Those are the choices members of Congress are facing in the not-too-distant future over the extension or death of this year's $8,000 credit for first-time home buyers.

Here in Tennessee about 36,000 people had filed claims for the credit by mid-Sept. The National Association of Realtors says about 1.4 million taxpayers had filed (or amended) their 2008 income tax returns claiming the credit so far this year. NAR had projected that about 1.8 million taxpayers would claim the credit.

There's no doubt the incentive has breathed some life into the struggling local, state and national housing market as did the cash for clunkers incentive for the automotive industry. But that doesn't mean it's without critics.

Although virtually every Republican member of Congress voted against the stimulus program that continues the credit, some of the biggest champions of expanding the housing program are in the GOP ranks. Sen. Johnny Isakson, R-Ga., a former Realtor is the prime example. Sen. Bob Corker has made some political hay with the credit. He told a group of 350 Middle Tennessee real estate agents and closing attorneys, "The fact is that housing led us into this crisis that ended up migrating into the financial system, and if we are going to change what is happening in our economy right now, you cannot do so without focusing on our credit markets and focusing on housing."

"Housing led us into this crisis" was Corker's way of soft shoeing around the reasons behind the economic mess that shocked lawmakers of both parties who were surprised at the impossible mortgages so many homeowners had taken out. An editorial in USA Today is a little more succinct in its explanation: "Through a never-ending series of new tax breaks and subsidies, and the expansion of existing ones, Congress and successive presidents have done everything in their power to get people to take on mortgage debt.

"They have allowed borrowers to deduct interest on mortgages up to a $1 million. They have set the capital gains tax rate at 0% on profits from the sale of a primary residence, up to $500,000. And they have created and nurtured Fannie Mae and Freddie Mac, the government-backed companies that dominate the mortgage industry, to expand lending to questionable borrowers, putting taxpayers at risk of multibillion dollar losses."

You guessed it. The USA Today editorial argued that Congress should let the tax credit expire because:

- Housing is recovering.

- The tax credits are a form of government spending, and the government has already run up a $1.5 trillion deficit this year. It's estimated that a one-year extension of the program could cost up to $100 billion.

- Letting it expire should send a signal to other powerful lobbies that Congress is drawing the line on more spending.

USA Today's editors also observed something that tax credit opponents have always argued, "despite all the talk about helping the housing market by making homes more affordable, tax breaks don't really make owning a home more affordable." Why? Because when government subsidizes home buying, it increases the number of people in the market and the amount they can afford to pay, which drives up prices of existing homes.

That's not the way the NAR, mortgage bankers and others advocates see the situation.

David G. Kittle, chairman of the Mortgage Bankers Association, wrote an opposing view and said, "allowing the credit to expire would put in jeopardy the recent signs of recovery."

He and other advocates argue that the credit should not only be extended, but expanded to include some of the provisions that were axed when it was approved earlier this year.

They want the credit extended to $15,000 and made available immediately so buyers don't have to wait for the end of the tax season.

He also argues that expanding the tax credit "would accelerate the recovery by stimulating demand among "move up" buyers, existing home buyers who want or need a larger house. This would spur buying and price stability in a new segment of the housing market, further accelerating an economic and housing recovery."

A Deutsche Bank report estimates that the credit has been used in 350,000 home purchases in the last six months - about half of the new homes sold during the same period. The NAR uses the same figure to estimate the number of purchases that would not have been made without the credit.

Economists are divided on the question.

Mark Zandi, chief economist at Moody's Economy.com, agrees with the real-estate lobby's support of an extended-expanded credit program.

But experts at The Tax Policy Center, a function of the Brookings Institution and the Urban Institute, counter that the $8,000 credit is one of the worst provisions in the stimulus bill.

The arguments are typical of the walk up to Congress' decision.

Until then, first-time buyers have until the end of next month to finalize a purchase that qualified for the credit.

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Home prices have fallen about 30 percent through the end of August during the housing downturn. Recent economic data indicates that the unemployment rate, overall, has just reached over 10%, the highest since the 1980s. However, the true unemployment rate might be a bit cloudy, especially if you factor in the underemployment rate. Underemployment is a condition in which a person has to work part time without electing to, is unable to find work though searching for it, or a job which they are overqualified for, and if factored in, it's believed the unemployment rate is closer to 27%. In response to the rising unemployment rate, an unemployment benefits extension has been attached to the homebuyer tax credit extension bill, extending benefits to up to 20 weeks or more, for those who qualify.

ChloeQ Qer | 11/18/2009 - 1:02 AM - ( Comment

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