Do We Need The $8000 Tax Credit Extended? A Comprehensive View

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Mortgage and Lending with Equity Resources NMLS 67179 Licensed in NC

Days like this I miss Louis Rukeyser!I've just spent several hours reading about the Economy and here's what I've come up with (Sorry it's so long):

The Fed Released the Beige Book, on October 21, 2009.  It begins with this statement:

"Reports from the 12 Federal Reserve Districts indicated either stabilization or modest improvements in many sectors since the last report, albeit often from depressed levels. Leading the more positive sector reports among Districts were residential real estate and manufacturing, both of which continued a pattern of improvement that emerged over the summer. Reports on consumer spending and nonfinancial services were mixed."

Well, that's not too surprising - First Time Homebuyers are finally deciding to purchase with the end of the Tax Credit nearing.  Further in the report it says:

"Most Districts reported that housing market conditions improved in recent weeks, primarily from a pickup in sales of low- to middle-priced houses. Contacts reported that sales were boosted by the government's tax credit for first-time homebuyers... Sales of higher-priced homes were very slow... Moreover, real estate agents in the Boston and Cleveland Districts were uncertain about the future of home sales once the tax credit expires. Availability of financing continued to be a concern for potential buyers..."

This is a COMPLICATED ProblemWhat is it that normally causes people to purchase homes?  JOBS.  When people feel secure about their JOB, they will then purchase homes!  Dr. David Altig, Senior VP and Research Director at the Atlanta Fed, points out on October 21, 2009 that we have a PROBLEM with Jobs and Unemployment, on a scale that we've never seen before!

Underneath the usual total unemployment numbers are the reasons an individual is unemployed: You are on temporary layoff; you quit your job; you have reentered the labor market and have yet to find a job; or you are entering the job market for the first time and have yet to find a job. Or, finally, you have been permanently separated from your previous employer, who has no expectation of hiring you back.

The last category is the dominant reason for unemployment at this time. That might not seem surprising, but it actually is. Never, in the six recessions preceding the latest one, did permanent separations account for more than 45 percent of the unemployed. The current percentage stands at 56 percent as of September and appears to be still climbing

 "The number of people receiving paychecks will drive the demand for houses and apartments, and the recovery will begin when unemployment stops rising." said, Jay Brinkmann, Chief Economist for the Mortgage Bankers Association,in Testimony on Tuesday.

The Obama Administration is (obviously) aware of all of this, and Congress is Holding Hearings to extend the Tax Credit...  But the question remains, with a HUGE deficeit, do we NEED to extend the Tax Credit?

I thought a report by the Carnegie Endowment was interesting.  It looked at Housing as a Percent of GDP, and weather a Gradual Rise in the Housing Market would impact GDP, Consumer Confidence (which most feel is tied to Consumer Spending and Job Growth).  In otherwords, is the Housing Market a CRITICAL ingredient in creating a healthier Economy? YES!

"Looking forward, even moderate improvements in the housing market will provide a significant boost to the global economy."

Besides the Tax Credit, there are other factors effecting the small movements in the Housing Market.  Congress has much to ConsiderObviously having historically low interest rates helps folks qualify.  The Federal Government purchase of Mortgage Backed Securities is slated to END in March, 2010.  When this happens:

"Analysts at Barclays Capital in New York forecast mortgage rates will be slightly over 6% by the end of March."

Coincidentially, Credit is becoming Tighter at the end of March, according to Fannie Mae Guidelines... and there are reports that the number of foreclosures entering the market will continue to rise.  So again, IS THE TAX CREDIT EXTENSION NECESSARY??

"Senate Banking Committee Chairman Chris Dodd said, "We still need to use every tool at our disposal" to help the housing market. Dodd, D-Conn., has joined Sen. Johnny Isakson, R-Ga., in sponsoring a bill that would extend the credit until June 30 and expand it to people who already own homes."

It will conservatively cost 1 BILLION dollars a month to Extend the Credit.

The IRS says the level of FRAUD is "Disturbing."  The IRS opened 107,000 civil cases related to the credit and identified 167 criminal schemes at an additional cost of over a HALF A BILLION $$!!

An interview of Tim Geithner by CNBC Anchor, Maria Bartiromo went like this:

BARTIROMO: You look at what happened with the cash for clunkers deal. We went from horrible to great to horrible again. The first-time homebuyer credit. So what happens when the stimulus is gone?

Sec. GEITHNER: ... We're not going to make the mistake many countries made in the past of putting the brakes on too early and creating risk that we have a, you know, weaker recovery with even higher levels of unemployment going forward.

I guess I weigh in like this.  I study the Four Bad Bears.  I think if the "Collective They" allow the Tax Credit to Expire, Raise rates (through a change in Policy) and make it even more difficult to purchase because of tightening Credit Score Guidelines - we're looking at a "W" in the recovery - and we'll be looking more like the 1929 - 1932 Era.  Housing is an important part of the Recovery.  If we had a great JOBs Picture - I'd feel differently.

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Rainer
67,109
Steve Lauver
Nebraska Realty - - Papillion, NE
Omaha Realty -- 402-689-7550

I agree jobs are key to our recovery.  I would love to see the credit extended, but believe the real estate market will at some point need to stand on own two feet and eliminate the credit.

Oct 22, 2009 08:33 AM #22
Rainer
44,690
Cara Pearlman
Frankly Real Estate, Inc - Bethesda, MD
Realtor - ABR, SFR

We have buyers that wanted to buy before the end of November to take advantage of the credit but are holding off because they are concerned about their own job security. In fact, another agent in my group was about to write an offer Monday night but the buyers canceled as one of them lost their job.

As important as it is to stimulate the market, it is equally important to create an environment that offers more job security.

Elizabeth's idea is a better alternative than extending it automatically now. The moment rates go up Buyers' fears will be intensified.

Oct 22, 2009 08:39 AM #23
Rainer
49,820
Al Lorenz
Criterion Properties - Chelan, WA

Eleanor,

You didn't look at the costs.  The credit that is about to expire cost $43,000 in debt for each incremental home buyer.  Using the NAR and NAHB numbers, the extension is projected to cost at least $259,000 for each incremental buyer.

It is not needed.  It is criminal theft at the behest of the NAR.

Oct 22, 2009 08:53 AM #24
Ambassador
699,999
Lee & Pamela St. Peter
Berkshire Hathaway HomeServices YSU Realty: (919) 645-2522 - Raleigh, NC
Making Connections to Success in Real Estate

Ms. El - you've outdone yourself!!!  Fabulous rehash of a messy situation.  I for one don't want this tax credit extended but agree with Elizabeth Weintraub - I'd like to see another one come out in the spring.  I think we need to step back and evaluate how this one did work.  Could it be improved?  There's a lot of suggestions of extending to all home buyers - maybe that would be even better in jump starting the ripple effect on jobs.  Well done and congrats on the well deserved shiny new featured start!

Oct 22, 2009 08:57 AM #25
Rainmaker
223,439
Brian Brumpton
Keller Williams Boise - Boise, ID
Boise Idaho Real Estate

I'm still on the fence about this one.  The level of fraud is concerning.  Jobs are definitely a key factor in getting things going again.  What I do know for sure is either way, I'll be on the ground, helping out homeowners who need solutions, and don't have time to wait for legislation. 

Oct 22, 2009 09:03 AM #26
Rainer
128,905
Dan Quinn
The Eric Steart Group of Long & Foster Real Estate - Silver Spring, MD
Dan Quinn

Eleanor, Excellent post!  I am so down with you on this. 

I believe unless unemployment improves we are going to be in trouble and could have a double dip recession in this economy.  The unemployment rate must improve in order for the housing market to improve substantially and this will be the key to the overall recovery of the economy.  We need more J-O-B-S.

The tax credit has helped to some degree, but frankly, if the availability of homes at 50% of their previous selling prices wasn't enough to bring buyers back into the market, I am not sure that continuing it will bring about any significant impact.  Even if it did work, it only brings forth the purchase (leaving a hole in the future economy where the purchase would otherwise be) while heaping on more govt. funding to an already staggering debt the country is amassing. 

Oct 22, 2009 09:17 AM #27
Rainer
115,631
Shari Song
Berkshire Hathaway Home Services - Federal Way, WA

Thanks for the thorough research and good article. This is something we will have to watch very closely. I see your point but I am hoping they extend the credit.

Shari

Oct 22, 2009 10:31 AM #28
Rainmaker
135,700
Paul Francis
Francis Group Real Estate - Las Vegas, NV
Las Vegas Real Estate Agent - Summerlin Homes

Eleanor,

Some other considerations:

What happens to the value of the dollar from excess borrowing / printing to pay for all of these programs? (The Federal Deficit is already over $1.45 Trillion for the year...)

Who really benefits from propping up home prices with these subsidies? Owners doing a short sale? No... Banks? Yes... (Really now... think about the % of homes selling that are "distressed" sales and who is really taking the beating.)

Are we going to have the discussion of extending the tax credit every time it comes near the end? Really now... buyers have had over 6 months to take advantage of this...

Are High Home Values really good for the consumer and/or economy? All things the same... what's better for the economy -- A homeowner with a $1,200 mortgage or a $2,000 Mortgage?

Personally....I'd prefer to see people being able to take out cash advances on their credit cards to make a down payment so I'm not on the hook for it.

Because seriously... you are on the hook for it one way or another.... even if you can't take advantage of the money giveaway.

(By the way... High housing prices, cheap and easy credit created the economic crisis in the first place. Trying to repeat it through a different system is only going to delay the inevitable. Resources are currently being wasted. Instead of going to something that creates Real, Sustainable jobs for a True Recovery... we are throwing more money at the banks in a roundabout way.)

Oct 22, 2009 11:05 AM #29
Rainmaker
1,025,671
Rob Arnold
Sand Dollar Realty Group, Inc. - Altamonte Springs, FL
Metro Orlando Full Service - Investor Friendly & F

Though it certainly can't hurt our business in the short-term to extend it, I think for the greater good of our country they should let it expire.

Oct 22, 2009 11:25 AM #31
Ambassador
890,780
Lane Bailey
Century 21 Results Realty - Suwanee, GA
Realtor & Car Guy

I'm in the expiration camp.  Firmly.  And I agree that jobs are at the center... and at the center of jobs are small businesses.  And peeling the final layer of the onion, I think that we need to radically alter they way we tax small business... But that is a completely different subject. 

Oct 22, 2009 02:27 PM #32
Rainer
332,763
David O'Doherty
Raleigh Realty Inc - Clayton, NC
Clayton NC Homes, Raleigh, NC

Eleanor, what a well presented article, congrats on the feature, well deserved. I feel that while the credit has urged some folks to move, I have not seen the effect we were hoping for, I have a couple of buyers that were interested but they are not being pressured by it. There is another side to this and that cannot be measured and that is perception, the more we talk about credits, tax relief, extending, making the credit available to everyone...what are we doing, but having people second guess, wait, and delay a purchase just because. I say we end it and let the cards fall where they lay. The sooner we get back to normal conditions the better.

See you soon.

Oct 22, 2009 03:10 PM #33
Rainmaker
575,553
Terry & Bonnie Westbrook
Westbrook Realty Broker-Owner - Grand Rapids, MI
Westbrook Realty - Grand Rapids Forest Hills MI Re

I agree with those that think the credit needs to be extended at least until the unemployment numbers start moving in the right direction.

Oct 22, 2009 04:39 PM #34
Anonymous
Mark VanBuskirk from Remax Property Specialists in Lehighton, PA

I agree with the need to extend the credit, yes we are "bailing" out the first homeowner,the builders,the realtors,the plumbers,the electricians,the real estate lawyers,home depot and dozens of others who are helped by the sale of homes. To me it is a no brainer compared to bailing out the CEO's of the banks... or should I say the crooks that have raped the american people to get thier million dollar bonus... and I don't see these people as the ones being foreclosed, those individuals were people who over extended themselves into mega colonials promised low interest loans by crooked bankers only to see the adjustable rate explode thier payment after the initial 1-3 year honeymoon.

Oct 22, 2009 09:55 PM #35
Rainer
60,640
Dan Homan
Coldwell Banker Ellison Realty, Inc - Ocala, FL

First - There is no "$8.000 Tax Credit."  The credit is 10% of the homes cost up to $8.000.  Many folk that qualify are buying homes that cost much less.  This terminology misleads a group of home buyers that typically do not hire tax preparers in the first place, many of whom will be disappointed to find out how little of $8,000 they are actually entitled to as a refund.  Second you cannot tell if a person qualifies without knowing if they are (legally) married.  In the light of fair housing law, lets have a show of hands on who is going to navigate that swamp.  Because of these areas of exposure we should not be discussing the credit with customers at all.

Oct 23, 2009 12:19 AM #36
Rainmaker
189,655
Clint Miller
Real Estate Pipeline, Inc. - Missoula, MT

Im not going to argue that this program should be terminalted....thats my personal view...

But, what I am going to do is congratulate you on a wonderfully well thought-out presentation and analysis!! My economics professor would applaude you!

Nice work!

Oct 23, 2009 12:27 AM #37
Rainmaker
134,099
J Perrin Cornell
Century 21 Exclusively, Wenatchee, WA - Wenatchee, WA
Broker, ABR, VAMRES

are we just robbing future purchase with the 8K? at what cost?

I do want to chime on on a very good post though!

Oct 23, 2009 02:12 AM #38
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273,238
Eleanor Thorne
Equity Resources - Cary, NC
Equity Resources 919-649-5058

Hey!  Thanks everybody for commenting!  My husband thinks I need to join "Link A Holics Annonymous!"

Dan Homan is absolutely correct - there's no guarantee of a $8000 check, and it can be misleading.

Oct 23, 2009 05:12 AM #39
Anonymous
Carl Reed

To France and Mark Clausen; small business is the main generator of jobs in America.  As long as the government keeps distorting the market with our tax dollars, small business will remain stagnant; as will job creation.  The tax credit needs to expire.  Government intrusion into the market can only prolong the pain. 

Oct 23, 2009 05:43 AM #40
Rainer
209,706
John Wall
Realty Connect USA - Hicksville, NY

Eleanor - Great post...obviously a great deal of effort and analysis went into this.  Everyone has an opinion on this of course, but the bottom line is, at this point, all we have to do is wait and see.  In my market we're already seeing a shift from buyers to shoppers.  In a week or two, we should know for certain whether the buying has ended and the market becomes stagnant again.  My feeling is that if the market slows considerably and nothing is done to get it moving again, the next wave of foreclosures will happen and we will see a major drop in prices again.  It's a perfect example of "somebody has to do something".  Failure (and inaction) are not options here.

Oct 24, 2009 12:42 PM #41
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Debe Maxwell, CRS
www.iCharlotteHomes.com | The Maxwell House Group | RE/MAX Executive | (704) 491-3310 - Charlotte, NC
Charlotte Homes for Sale - Charlotte Neighborhoods

Hi Eleanor!  Excellent information and I have to say that I agree with Susie--although ambivalent about this, my mind tells me that this is not good for our economy--it's just a band-aid; and my heart says, YES!  Let's get some homes moving!  I struggle with this but, just don't want to see this end and then find that we're right back where we came from all over again!

Congrats on the FEATURE!  You ROCK girl!

Nov 19, 2009 02:40 PM #42
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Eleanor Thorne

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