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Why and how I think the $8,000 tax credit could be better spent

I applaud the government for trying to at least do something to stimulate the economy by getting the housing market going. I think the government is trying to get things moving by doing the only thing they know how to do when they see a problem. THROW MONEY AT IT!

Here is the why I think this $8,000 tax credit is a bad idea. Today there are more home owners than there ever has been at any other point in our history. So, throwing money at people to buy who were, more than likely, going to buy anyway, is just throwing money away. These people are buying homes that they would have already bought anyway, but just at deeply discounted prices because home prices are rapidly falling because of short sales and foreclosures. (It may sway a few, but probably not.)

Here is what is happening and my idea on how that $8,000 could be better spent.

The main thing that needs to be done today to help our economy is to stabilize the housing market and get people spending money again. To stabilize the housing market and to keep prices from continuing to fall, we need to stop the short sales and the foreclosures. The people that are in foreclosure proceedings are not spending money, they are holding on to every dime they can.

What is happening is after they lose their home to foreclosure or short sale, they are finding that their credit has been damaged to the point that they can’t even rent a home and they end up moving in with family members. Once again, money is not being put in to the economy.

Now, let us put that $8,000 to better use!

If you lost your job and you were making $5,000 a month, after two months, you are now behind on your mortgage payment. Then you look for a job for two months and finally find one, but you are already behind on your mortgage payment along with all your other bills.

Now, you have to wait 2 weeks to a month before you get your first check and then you have to figure out how to pay everyone back and catch up and out of your first $5,000 paycheck… you already owe $9,000 in bills and late fees. Every month you try to catch up, but you can’t. It just really is impossible and so you have to do a short sale or your home goes into foreclosure while you try to play catch up.

How about if someone loses their job due to layoffs or business closure, we take that $8,000 and help them pay their mortgage payment? Most mortgages are under $2,000 a month and that would keep a family in their home for another 4 to 5 months while they find another job. They could spend what money they do have on food and other necessities and this keep the economy flowing. Once they have a job, the government stops paying. This could only be one months payment… $1,600 vs $8,000. It’s easy for me to see which is cheaper.

But, there is more to how this would help. If theses homes are going into foreclosure or having to be on sold on short sales for 50-60% of the loan balance, then the housing market would naturally stabilize and the banks could start to lend again without worry. The economy would start to stabilize and our country could get out of this rut we have been in for the last year or two and get back to enjoying life again. We would not have to worry if next month their $250,000 home will be worth only $125,000 and if they are even going to have a job.

I would love to hear your thoughts on my plan. If you like it, feel free to start a grass roots effort and tell everyone you know about it and maybe, just maybe, some government official will like it and we can get this country back to what it was two years ago.

Todd Clark - Broker / Sales Coach
Palazzo Realty Group
Phone: (503)524-9494
Fax: (503)622-8739

Posted by Todd Clark (Broker) (503)524-9494 (Beaverton, Oregon Real Estate Expert) on 04/04/2009 06:25 AM

Comments (60)

$8,000 Tax Credit for First Time Home Owners. in the ActiveRain Channel

why and how i think the 8, 000 tax credit could be better spent, todd clark

Originally posted at: Living Beaverton - Your guide to everything Beaverton: Why and how I think the $8,000 tax credit could be better spent

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60 Comments on Why and how I think the $8,000 tax credit could be better spent

APR

Todd - I have been saying basically the same thing so I agree 110%. It makes sense to me. ~Rita

Todd 1:49 AM ? Cant sleep tonight? I am up early to get a head start on today. Showings, ballgames and a listing.

Rita - I just wish big government would leave their office for a little while to realize if they put pride on the shelf and listen to some good ideas for once, they could fix the problem.

Laura - It was only 11:49 here on the west coast when I posted, but now it is 2:53 and yes I still am up. Not bad for someone who doesn't drink coffee.

I so agree with you. Giving $8000 to first time home buyers was nice, but they already had that option for a mere $500 less. Those that could buy would be buying anyway. It is unfortunate our politicians aren't creative enough to come up with an original plan. ho hum.

Todd, I am seeing lots of buyers jumping off the fence precisely because they know they will be getting that $8,000 credit. These are people who were not going to buy anyway. They were still hemming and hawing about whether to buy now or not. Then the plan came along and made them change their tune. I think the plan is having it's intended effect.

The post was still a great read and I love how you put it together. Congrats on your gold star.

Kristal's comment wasn't there when I was writing mine so I didn't see it.

The problem with the $7,500 credit that was there before was that it was a loan. People didn't like the idea of having to pay it back. It did not provide the incentive they thought it would.

At least in my neck of the woods, I am getting buyers in droves who were not there before and are now looking because they know they're getting that money next year. Local officials are even looking for ways to advance them the money so people who don't fully have funds to buy now can take advantage of the plan.

Todd, this is a very good idea. Now for the BUT.......Don't you think that tis is a little outside of the box for most politicos?

Todd, I too agree there are better solutions. Like you pointed out it is just for First time home-buyers. Last year 41% entered the market that were shut out to do inflated home prices.

However, in any given year 31% of all homes sold are for First time homebuyers so most of them would have been entering the market anyway.

I would have rather seen it be applied to the move up buyers too, they are loosing money on the current home and this would have pushed them off the fence to go ahead, take the loss, get the credit and move.

IMO

Come on now. That bailout actually makes sense. The federal government would never go along with that.

Todd Your plan makes sense, but I also agree with Maggie. I am seeing an increase in buyers bcause of the new tax credit where before they didn't want to pay back 7500 even if it was tax free.

I have even gone as far in my buyer packets when I meet with new buyers in the packets I have the application for them to apply for. It is pushing those who were thinking about buying actually taking the plunge.

I know what you are saying but I also know that I have well over a dozen first time home buyers and of that group 90-95% are buying because of the credit. Some were on the fence and that made them jump.

I think we need both in place.

$8000.00...

Boy I could do some serious shopping with that. I wonder if I can buy a morphine button? I miss mine :)

Nice post. Pretty post. Great post. Wonderful post. Thanks for sharing :)

TLW...ROAR!

Todd - while your alternative makes sense, first time buyers are moving off of the fence because of the $8000 credit where they were not with the $7500 credit.

I am not sure about providing those that have lost jobs $8000 credits to make home payments. However, the current programs, last years H4H and Obama's plan this year don't seem to be the panaceas. But great thinking out of the box.

Your idea is out of the box,I agree with Steve. Just like unemployement they can get additonal credit to keep up with the bills but beyond that scarcity does create new opportunity/creativity.

Good idea, if you could convince the gov. then it could work. There are to many bosses in the gov. & not enough offices.

I agree that the $8000 does not do too much to help first time home buyers, if they are buying, they would anyway , with or without the tax credit. it doesn't really push them over the fence just because they are getting a tax credit.

I have two buyers right now that are buying precisely because of the $8,000... Both are obviously first-timers. But, I'm not really hyped on the plan, because I wonder what will happen when it stops...

But let's talk about your plan...

So, we should give more money to people that aren't working to pay for a house? Should they not have built up a reserve fund? Should we give it to anyone that loses a job, or just those that are in danger of foreclosure? If we are giving it to anyone, what about someone that quits their job because they know there is a new backstop and they see it as a vacation? If it is only for people that are in danger of foreclosure, what do we tell the people that lose their job and aren't in danger of losing their home because they have adequate reserves?

I wonder if the better thing would have been for the government to not have made this giant bill that my kids are going to have to pay...

My first-timers are more driven by the lower prices more than anything else.

This is a highly complicated problem and I agree with Lane. I think your plan would be fraught with abuses. How about people that have across the board pay cuts. They are still employed, can't get unemployment as a result, but struggle to make ends meet now. Do they qualify? Because that is a large portion of Oregonians now. Across the board pay cuts are very common out here in an effort to try and keep people employed.

I just think there are too many issues at play. Legislation can only get us so far.

This remedies are not mutually exclusive. I was hoping for any buyer to be able to use the money because we need stimulus now. This just doesn't only help buyers and sellers, Realtors and the like. It also supports Home Depot, Lowes, and general contractors. As for short sales and foreclsures, yes there should be more done, but some people need to fail. We have to get back to affordability and find real pricing. Foreclosures and short sales will always be with us. Sam Walton failed miserable twice, and I think he did all right on his last venture. Let some people fail. Your post is a great stimulus for discussion.

The $8000 is not perfect however there is no doubt that it will push many fence sitters into purchasing now rather than later and the $8000 will be spent on home improvements and in the local communities which will stimulate many small businesses.

Both plans have merit. I see the current plan moving new buyers off the fence which is exactly what we need.

I do think some help should be provided to those facing foreclosure due to downsizing and layoffs, just not sure this is the government's job. Really feel the banks need to find creative options for current loan holders.

Great Post. Thanks for sharing your good and sensible ideas.

Good idea if it went to those that lost jobs and were diligently seeking jobs.

What % of the foreclosure market though is because of adjustable rates increasing? Those that purchased homes who could not afford them at a higher interest? What would you do with them? Thanks for your post.

Todd,

I agree with you about this, the $8,000 tax credit is insignificant to the point that it has not actually stimulated demand for real estate. Nationally, mortgage applications and home sales have been largely unaffected. In other words, the government is giving $8,000 to first time home buyers for something that they were going to do anyways. I agree, this is not a good use of tax payer money.

I like that the government has tried to help in some way, even if it is flawed. I think your plan sounds like a better use of the money, but there will always be individuals who would attempt to get that money and still go into foreclosure/short sale because they didn't use it the way it was intended. I really agree with Missy in that I wish the $8,000 credit could be claimed by more than just first-time home buyers.

Your plan makes a lot of sense.

That's probably why, like most othere sensible plans, it will never see the light of day....

Great post and some good ideas but like smeone said the government is not run on things making sense. Look no further than bailouts and our tax codes.

I think this is a sensible idea. My only concern is that like a lot of severance packages, it would be easy for someone to be a little lax in searching for another job if they know they have 4-5 months of help coming. If they could tie it into unemployment benefits somehow, and make actively looking for work a criteria for payment, I would be on board. I just don't want it to band aid a problem, if those homes are going to come on the market anyway in 4-5 months, lets get them sold at short sale now at the highest possible price, rather than in 5 months let them go to foreclosure or even short sale then.

$8,000 or not is temporary and superficial. First time home buyers are not in a strong position to qualify for financing. Many existing home owners are not financially capably of keeping their homes. This is a matter of saving, employment, and economic understanding. A growing economy has nearly full employment. A growing economy implies that there is new money that feeds the growth. New money does not come from the printing press. It comes from taking raw material, making something of it, and an end user to purchase it. This is called manufacturing. (Excuse me)

Due to our schools the people in corporate management, the legislatures, judiciary, and our universities do not really understand profit and loss and competition. Businees follows the money. We demonized coporate welfare to create a global one world rule. However, tax breaks for adding employees, capital equipment, research and development, and expanding distribution would bring jobs back and we would not have to print trillions of dollars.

Sorry, a Realtor can not be saying things like this.

I think everyone is overlooking the big picture. The whole reason 1st time homebuyers were given the benefit is so that it would start a dominoe effect and get those "other" homes sold. The more 1st time home buyers, the supplemental homes sold down the line. It's not "rocket science". If it were, it wouldn't have come from a politician!

I worry that this $ 8000 incentive is being used by renters that don't have any money saved , because they don't know how to budget and only live for the moment,i.e. spend every penny they get, because "they want it now".

This incentive , for the bottom of the market, might be very good if given to people that can afford to buy a house for the long term and don't go immediatly in foreclosure if some unforeseen ,but unavoidable, things happen in life.

We see again very high LTV loans, where the $ 8000 is used to pay the closing cost. I am afraight we just create another round of foreclosures.

This is another opportunity where we as realtors can advise people to do the right thing ,so we don't have to come back in a few years and say " we just did our job", while our buyers are in a mess.

I rather see another incentive ,much higher ,like a $ 15,000 tax deduction for everyone that actually can afford a house or second home, this would include investors . I don't care who buys as long as it stops the downward spiral.

It looks that every thing this government does is based on the" spread the wealth" principle.

Everard, $8000 used to pay closing costs??? What are you talking about? It's a TAX CREDIT it CANNOT be received at the settlement table. How long have you been doing this? You need to check your facts. ( see below) The crap about renters is just that!!! Geez! It's guys like you that give Realtors a black eye!!

President Obama just signed the economic stimulus package in Denver, CO which includes a gift for first time homebuyers- $8,000 (or 10% of the home's value, whichever is less) on their 2008 or 2009 taxes.

Here's the skinny, from CNN:

Refundable: The credit is refundable, meaning tax filers see a refund of the full $8,000 even if their total tax bill - the amount of withholding they paid during the year- was less than that amount.
Purchase Date: To qualify for the credit, the purchase must be made between Jan. 1, 2009 and Nov. 30, 2009. Buyers may not have owned a home for the past three years to qualify as "first time" buyer. They must also live in the house as their primary residence for at least three years, or they will be obligated to pay back the credit.
Paperwork: Applying for the credit will be easy - or at least as easy as doing your income taxes. Just claim it on your return. No other forms or papers have to be filed. Taxpayers who have already completed their returns can file amended returns for 2008 to claim the credit.
Income Restrictions: To qualify, buyers must make less than $75,000 for singles or $150,000 for couples. (Higher-income buyers may receive a partial credit.)

In my opinion giving people 8K credit to buy houses does not solve anything. It wont make the bad loans go away or keep the banks from going under. Plus if banks dont lend out money unless you put down 20% and have a 720 credit score then whats the point? I agree 8K can be good for some people but its not going to bring back the economy. We have to do a restart in the banking system, automotive system and get realistic in the real estate world.

The prices we had during the boom were insane. I told alot of my clients with subdivisions to sell everything and not be greedy cause you could see the signs that it was not going to last and fall fast. Some listened and others did not. Well those who did listen thank me, still made money and those who did not listen and got too greedy are either bankrupt or close to it.

This is just my opinon.

I like the sound of helping those with a job loss to make their monthly payment. That makes alot of sense.

Todd - Artfully stated. I have a couple of buyers buying right now simply because of the tax credit (well, and the low interest rate). But you're right. It seems silly. The $8000 isn't going to help the ones who need it the most. It will help some good folks get off the fence. But the folks who are in jeopardy of losing everything, need this more. I'm conflicted. It doesn't boil down to a partisan issue, which is nice. But it will require some very brave folks in Washington who are not afraid of the repercussions and ostracization. Honestly, I'm glad you raised the point. I'm all about grass roots movements. Cheers for being brave.

Amy's Sweet Signature

The $8,000.00 is having a positive impact and getting people into homes that can make the payments. I am concerned your plan would only prolong the issue. The other possibility is just forgiving a portion of the mortgage, but if this is done by BK or goverment force no one will want to invest in the mortgage market again.

Your suggestion makes a lot of sense to me. People are having troubles in this economy, and anything that can be reasonably done to keep them in their homes will help to stabilize things.

APR

I think the only way this situation is going to be resolved, is when people feel job security again. I do not care how many tax credits the goverment gives, if a potential buyer is worried about how long he/she will have a job, they will simply do one thing:NOTHING. Good post.

Kristal - The plan they had before was more of a loan though and I actually preferred that plan. At least the government was getting their money back.

Maggie - Maybe I was doing something wrong because I wasn't seeing that. Watch for my post tomorrow morning... WOW! What a difference a day makes. As for advancing people the money... That is petty dangerous move, I see them not getting it back!

Don - Yes, but that is why I'm here... (LOL) I do see some changes that need to be made to my plan based on the comments here, but over all, I still think my plan is sound.

Missy - I agree, the original plan that got thrown out of the bill to give everyone a credit who bought was a much better plan than what ended up on the publics door steps.

Rob - You are probably right only because the proposal could be written in less than 10 pages where as anything they pass has to be 1000 pages or longer with a bunch a pork thrown in for good measure.

Jeannette - Before yesterday, I would have said "What are you talking about, my numbers are the same every month for the last 8, then... WOW, yesterday after this article it changed and changed big" I think I will have to call you and ask you about the wording on that so I can add that to my buyer's packet.

Shane - Both in place would be good, but my concern is in a year are these buyers going to be the ones selling in short sales and in foreclosure because they were "Pressured" in to buying when they weren't really ready.

Billie - No on the morphine button and yes, you could do some serious shopping on that! Bryant, hand her the credit card now!

Mike - I do understand that it is moving people off the fence about buying because they are actually getting a free $8,000 instead of an $7,500 loan.

My concern is to stop the short sales and foreclosures that are coming on the market, yet my idea does affect my bottom line because I specialize in first time home buyers, but the prices are dropping fast. If my buyers are buying because of the $8,000, what says they aren't going to be part of the problem in a year themselves. I would rather have no money given as the government should really stay our of it.

The scariest words for me to hear are "We are the government and we are here to help"

Steve - If they quit their job they are not eligible and they only have 4 months to find a new job no matter what their payment is. If they have a mortgage payment of $500, 4 months = $2,000, Mortgage payment = $2,000, they get $8,000 and that is paid directly to the mortgage companies and not them!

Ritu - Most of them can't get additional credit to keep up because they now don't have the income to support being given additional credit. That has been the problem with the loan modifications, they are telling the home owners they can't or won't do it because their credit is shot and they don't make enough.

Jabin - Oh, don't get me started on Government that is for a whole other post, that I will more than likely never write. (I try to keep it clean)

Sonny - No it pushed them because they want a vacation on the government this next summer!

Lane - Never to someone who quits their job! I think anyone who loses their job and have it paid directly to the mortgage company, this way no chance of it being mis-spent on say a vacation or a new car. Then upon getting a new job they will be required to send in first pay stub to verify start date, so they can't rip the system off.

I personally don't think even our new buyers getting the $8,000 are going to have that reserve in a year. I would prefer they not get involved at all, but that isn't the way our government works today. So, I thought I would throw them at least a better plan.

Melina - Personally I don't want the government involved at all, but if they are going to be, lets try something else besides trying to get new people to buy that aren't going to be in the same situation themselves next year.

As for pay cuts, that is what the loan modifications are supposed to be for and I've had them work for people who only took a pay cut rather than lost their job, they are losing a couple hundred a month and a good modification can save that every month for them.

Joe - True and there will always be foreclosures and short sales, even with my plan, it would just slow them down a little.

Pete - I don't think it will be spent on home improvements at all, but we will see.

Melissa - I don't think paying people to buy is the answer either though and you are right it really isn't the governments job!

Craig - My plan from last year would fix that... LOCK THE RATES at the rate they were originally given at closing and stop adjusting them! I do think it has to only go to those diligently looking also. As for those with adjustable rate mortgages, every short sale I've done in the last year has been because of divorce or job loss, not one because of an adjustable rate mortgage.

Mark - Throwing money around and seeing where it sticks has never worked in government, but since they seem to be able to do that, I thought I could throw them something that might actually work.

Jim or Maria - That is why I think the money should be paid directly to the mortgage company.

Robin - You are probably right on that one!

Charles - I know it won't happen, but I can at least dream.

Team Carroll - I would love it to be tied to their unemployment benefits, wouldn't need another government office to watch over these people then, it would already be in place.

Dwight - Sorry you feel this way, but my feeling anyone can say what they feel, that is what makes America so great! Now, I do agree we should give tax breaks and stop raising the minimum wage to get companies to hire. This would help more than what they are doing, but that will never happen with the administration we have presently.

As for the schools and what they teach today, this is exactly why I home school! Notice I didn't say I wanted this, I said if they are going to do it, this is a least a better idea.

Lou - The only problem it hasn't changed the actually number of 1st time home buyers getting in to the market, the percentage of 1st time home buyers in the market hasn't changed in 5 years.

Everard - I don't think you can get the money today, you have to wait until April 15th of next year, so it certainly isn't going to be immediate, but I do see people using it for things like vacation rather than saving it for a rainy day. I don't enjoy the the spread the wealth idea as it is usually my wealth going to someone else.

Lou - Come on, no personal attacks allowed here!

Michael - I don't think throwing money at the banks will help and I agree we do need a free start with all these, but I don't think it should be forced by the government. The government telling business what to do sounds very socialist to me and I'm not for that.

DeAndrea - Thanks, I just know it would never happen.

Amy - The problem I hear from so many agents is that if my plan goes in to affect their sales would drop because they don't have any buyers. Well, I'm more about helping my fellow humans rather than a large bank account.

What happened to the days of helping your neighbor without being forced to by our government. I don't think the government should be able to force us to give, but we should because we want to.

Gene - I agree with you that if the government forces a mortgage forgiveness, no one will invest in mortgages again.

Christine - At least someone sees it my way today... LOL

Ana - I think the government should stay out of business and let the economy do what it needs to do. But, since they feel they need to get involved at least do something helpful.

APR

Wow, that did generate a lot of interest. How about we just get back to the idea that the government is not going to bail you out every time something unexpected happens.

How about we have to save for the unexpected and no spend everything and yes, that may mean a smaller house or fewer kids, or two jobs etc.

To our mystery guest - I agree, the government shouldn't be there unless it has to be and it certianly shouldn't have got involved in the mortgage industry in the first place as that is what caused this mess in the first place. If my life isn't in danger, than stay away.

APR

Not into subsidizing anybody for any reason. Nice thoughts though because the $8K is not being spent wisely. You had me up until the last paragraph.

Lyn - I don't think the government should subsidize either, but convincing them of that isn't going to happen, so I figure lets go with the next best option, get them to put the money where it is needed.

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