A substantial tax credit for home buyers is likely to be part of any second economic stimulus package enacted by Congress.
Senate Democrats reportedly already have crafted a measure that includes a credit for taxpayers who help take down the record inventory of unsold homes. And when the Senate Finance Committee meets in a few weeks, Republicans are likely to join them in pressing for a version of a plan that worked in the mid-1970s to help clear off a then-record glut of completed but unsold houses.
Whether the renewed interest in a tax credit is a result of some hard-nosed lobbying on the part home builders is anybody's guess. But earlier this month at its annual convention in Orlando, Fla., the National Association of Home Builders took the unprecedented step of suspending all political contributions to federal candidates and their political action committees. The unusual move was taken because lawmakers failed to include two of the group's pet projects -- the tax credit and a provision that would allow builders to carry back net operating losses for an extending period of time -- in the initial $168 million stimulus package. "More needs to be done to jump-start housing and ensure the economy does not fall into a recession," NAHB President Brian Catalde said at the convention. The tax-credit proposal is just one of the ideas floating around Washington to shore up the ailing housing market. The New York Times reported on Friday that several plans are being kicked around that would help homeowners who face trouble with their mortgage payments, especially borrowers who owe more on their mortgage than their home is worth, a situation known as being "underwater." The Times said some major financial institutions are pushing for the creation of a new federal agency that would buy up troubled loans and reissue them with federal guarantees, in some cases repricing the loans so homeowners would no longer be underwater. Another idea is to expand the Federal Housing Administration's role in refinancing troubled loans. Inventory overhang The inventory of unsold houses, both new and used, is considered the main reason why the market is in the doldrums. And NAHB chief economist, David Seiders, insists that housing is at "the root" of the nation's economic woes. "House prices and inventories are central to the outlook for the economy and the financial markets," the economist said in his most recent forecast last week. Therefore, he reasons, policies that stimulate home purchases in the immediate future can pay huge dividends. "The biggest bang for the buck most likely would be provided by a temporary program of tax credits for home buyers," he said. In 1975, when there was almost a three-year supply of vacant houses on hand, lawmakers approved a $6,000 credit spread over three annual installments of $2,000 per year. According to the NAHB, that carrot brought enough buyers into the market that builders and their subcontractors were able to get back to work. Inventories fell and production doubled, taking the pressure off of housing prices. This time around, the builders are angling for a $10,000 credit, maintaining that on a price-adjusted basis, that amount is equal to the 1975 credit. Political realities But there are a few potholes in the group's path, not the least of which is the matter of cost. A tax credit is likely to put a $6 billion to $12 billion dent in the federal budget, and under current rules, that has to be accounted for with offsetting revenues. Another big problem is that a second stimulus package also is likely to contain provisions that are rigidly opposed by the Mortgage Bankers Association, namely a proviso that would allow the courts to write down the value of troubled borrowers' mortgages. If that happens, the package would pit two of the housing industry's strongest lobbies -- and which are often allies -- against one another. The MBA says allowing judges to modify mortgage contracts will increase the cost of credit to all borrowers at a time when financing has become more difficult to come by for all but the most creditworthy. "As long as this consumer-unfriendly provision is included, we cannot support the package as a whole," says MBA Chairman Kiernan Quinn. But the NAHB is just as convinced that the tax credit is absolutely the right way to go.
The inventory of new and resale homes fell modestly in December, the latest month for which figures are available. But the inventory-to-sale ratio showed little change because the volume of sales is so slow. And Seiders is concerned the numbers point toward further weakness. "What we really need is something to stimulate sales," he said at the convention. "It's housing and the financial markets that are taking the economy down. We've got to get home buying going. If we don't get this thing knocked down, the prospect for recovery is tenuous."
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