Home Buyer Tax Credit: A Possible Solution To Moving Housing Inventory?

Home Buyer Tax Credit:

A Possible Solution To Moving Housing Inventory?

We can all agree that moving existing home inventory from the real estate market will help housing in general. And now the CEO of Toll Brothers has come up with a proposal for Congress to pass a bill giving tax credits to home buyers.

Toll and other builders suffering through the downturn think that homeowners need extra incentives to get off the sidelines. Their pitch goes like this: If the government simply bails out people whose home values have dropped below their mortgage amount, or spends hundreds of billions of dollars on Federal Housing Administration loans, prices will continue to drop, and those government-subsidized loans also will end up under water. Better to urge potential home buyers off the sidelines and back into the market, so prices can stabilize.

"I believe that this is the way to stabilize the economy," Toll, chairman and CEO of Toll Brothers said in an interview on June 4. "Before trying to straighten out the credit market, you need to straighten out the basis of the problems in the credit market. You want to look at the asset that backs up that credit."

On the other hand, that "fix" alarms some economists and other financial experts, who think that a home-buyer subsidy will only serve to reinflate the housing bubble.

Toll said it has been done before. Congress passed a tax break for home buyers during a real estate downturn in the mid-1970s, he said, giving them a $2,000 credit for entering the market. About six months ago, Toll started to talk to lawmakers about a similar plan, although he thinks the pot needs to be sweetened to $15,000. He said he pitched the idea to Treasury Secretary Henry Paulson around that time. In February, Senator Johnny Isakson (R-Ga.) introduced a bill that echoed Toll's proposal.

The National Association of Home Builders has been pushing a tax-credit proposal since November, said Jerry Howard, chief executive of the NAHB.

Both the House and Senate versions of the Foreclosure Prevention Act include some form of tax credit for home buyers. The House bill offers buyers who have not owned a home in at least three years up to $7,500 in refundable credits if they buy a home in the next year. Single buyers with adjusted gross incomes less than $70,000 and couples making less than $140,000 are eligible for the full credit. The Senate bill gives buyers up to $7,000 if they purchase a foreclosed home.

The Senate also included other tax benefits for homebuilders, allowing them to charge current losses against the large gains they posted during the boom. House and Senate negotiators have begun meeting to resolve the differences between the bills.

Toll said targeting the tax credit only to certain buyers-such as first-time buyers or those buying foreclosed homes-is "silly" because it won't effectively spur the entire market. "The move-up guy can't move up," he said.

But is it up to U.S. taxpayers to stop the slide? Tomasz Piskorski, an assistant professor at Columbia Business School, calls the tax-credit proposal "an implicit subsidy to homebuilders" that would keep home prices artificially high when they probably ought to be falling. If builders and sellers would drop their prices, houses would start to move again, he said. A tax credit might briefly prop up the market but ultimately may just prolong the agony until real demand and supply find equilibrium.

The problem for homebuilders is that few people are buying much of anything today, and builders say they can't cut prices much more than they already have. Toll Brothers has begun offering incentives to home buyers in distressed markets. Some developers have gone to even greater lengths: In Escondido, Calif., just north of San Diego, Michael Crews Development is offering buyers a buy-one-house, get-one-free deal.

"I think homebuilders have been lowering prices to the point where they are just trying to recapture some of the land costs," Toll said.

For more information on proposed housing initiatives please contact Bill Kamboukos and Carlos Felix of Strategic Mortgage at (480) 219-3682 or by emailing: info@strategicmtgaz.com or online at www.strategicmtgaz.com

Declining Markets Restrictions Lifted

While we are not back to 100% financing, the Fannie Mae declining markets restrictions have been lifted as of June 1, 2008. These new changes will allow for lower down payments on primary residences, second home & investment property purchases. As well as both rate & term and cash out refinances. For more information on how these changes will affect you and your borrowers contact Carlos Felix and Bill Kamboukos of Strategic Mortgage today.