THE HOMEBUYER TAX CREDIT

The same housing industry that caused the bubble and an economic crash pushed Congress to pass an extension of the Homebuyer Tax Credit through June 2010, as long as buyers sign purchase contracts by April 30. Unable to stand on its own, the bill was added as a last minute amendment to a "must pass" unemployment extension bill, which was approved almost unanimously on November 5. Senator Johnny Isakson (R-GA) called the tax credit a "Housing Stimulus". HOT calls it a Cash for Lemons program and a threat to taxpayers and the economy. 

The latest version of Isakson's legislation would:

• Extend the $8,000 new home buyer tax credit for purchase agreements signed by 4/30/10 and homes closed by 6/30/10 (It's now set to expire 11/30/09);
• Extend the deadlines one year for active military serving abroad;
• Expand the program with a $6,500 tax credit for homebuyers who have lived in their homes at least 5 years;
• Increase the income caps to $225,000 for couples and $125,000 for individuals, up from $150,000 and $75,000;
• Apply the tax credit to any homes with values up to $800,000; and
• Help the IRS prevent people from filing fraudulent claims (as they've been doing so far).

Co-sponsors include Senators Lamar Alexander (R-TN), Jim Bunning (R-KY), Saxby Chambliss (R-GA), Chris Dodd (D-CN), John Ensign (R-NV), Joe Lieberman (ID-CN), Lisa Murkowski (R-AL), James Risch (R-ID), and David Vitter (R-LA).

SPECIAL INTERESTS: Isakson spent more than three decades in the real estate business, and from that perspective, he expects positive results, like when Congress responded to "a similar housing crisis" in the mid-1970s with a $2,000 tax credit for buying a new home as a principal residence. Buyers, builders and realtors all benefited. Taxpayers funded the program. We find it telling that his bill is endorsed by:

• The U.S. Chamber of Commerce,
• National Association of Builders (NAB),
• National Association of Realtors (NAR),
• Business Roundtable Housing Working Group, and
• Mortgage Bankers Association.

SOURCES: http://isakson.senate.gov/press/2009/061009housing.htm and American-Statesman

HOT ANALYSIS

Homebuyers will surely benefit, so what's wrong with extending the tax credit? Here are reasons we think extending the tax credit is a bad idea. It expands on some of the worse elements that caused the recession, will likely inflate another housing bubble, and could well lead us into another recession that may be even deeper this time. In short, it's an economic nightmare.

Top 10 Reasons why the Home Buyer Tax Credit is Bad for America:

1. It's unfair and not needed. The tax credit takes money from renters and people who already own homes and puts it in the pockets of home sellers and buyers (and their builders, realtors and mortgage companies). Government already has plenty of stimulus to help housing, and the Realtors' Housing Affordability Index - which accounts for prices, interest rates, and family income - is near all-time highs. The Federal Reserve is keeping interest and mortgage rates low, making it easier for qualified buyers to afford homes. The FHA is guaranteeing billions in new home mortgages that it probably shouldn't. Payroll tax cuts are increasing American's take home pay and helping them save for a down payment or provides more per month for them to spend on housing.
2. It's inefficient. The vast majority (some 90% of homebuyers) would have bought anyway, without the stimulus. According to the IRS, 1.4 million homes were sold since the program began. NAR estimates are higher at 1.8 to 2 million. Either way, the Associated Press puts the total incentive cost at about $15 billion. According to the NAR, the tax credit was the deal-maker in only 350,000 sales, and the NAB puts that at just 150,000.
3. It's expensive. Divide the $15 billion estimated cost of the initial tax credit by the number of conversions (people who would not have bought without the incentive), and the cost climbs from $8,000 per buyer to $43,000 per buyer. OUCH!!!
4. It skews incentives. America's tax code already favors homeownership. We deduct mortgage interest and points paid and borrow more so we can deduct more. So is it any wonder that we buy more house than we need and increase our financial risk?
5. It invites fraud. A mid-October IRS report says about 70,000 people have committed tax fraud by claiming the credit illegally. Some weren't buying a home but claimed the tax credit anyway. Others were under age, including one claim from a 4-year old.  
6. It's like heroin. A housing stimulus is a short-term "fix," not a long-term solution. It will make the industry more dependent on it. The limited $8,000 credit was a crutch to help the real estate market when it needed it the most. Take the crutch away in November and the market will limp along as it heals. Extending it will delay healing and, ultimately, recovery.
7. It could become permanent. Extending and expanding the program, even for just 12 months, could further the addiction and make it permanent. We're be moving into an election year when politicians will want to protect social programs like this.
8. It's inflationary. An $8,000 tax credit artificially inflates home values by about $8,000 today (or $15,000 with the expanded program), leaving buyers with more debt than the value of the property. Inflated home values were a big part of what got us into this mess.
9. It artificially stimulates demand. The Cash for Clunkers program caused anyone planning to buy a car to do it before the program expired, and the homebuyer tax credit will do the same thing. It will borrow from future sales. The car stimulus ended, and dealer traffic slowed to the lowest level in nearly 30 years. The same thing will happen with housing, but the tax credit MUST end if the industry (and economy) is to recover.
10. Extending it makes matters worse. Now the housing industry wants to extend the tax credit to $15,000 without restrictions? That would make current housing problems exponentially worse and is irresponsible, anti-social and detrimental to most of society.

SOURCE: Housing Stimulus and FHA Loan Guarantees put Taxpayers at Risk.

Substandard/Defective homes and Subprime Loans together sparked the global economic collapse, and any Fix Housing First program must fix BOTH. The following images show why the Homebuyer Tax Credit is like the Cash for Clunkers program and why we refer to it as a Cash for Lemons program. Homes with serious defects due to the lack of regulatory oversight and builder incentives to cut corners to increase profits are Lemons. We need a Lemon Law for homes, like the one we have for cars.