Yesterday the Senate added a housing tax credit to the President’s recovery bill that gives home buyers a 10% of purchase price tax credit up to a maximum of $15,000, ostensibly to support the housing and mortgage markets. I see this $19 Billion dollar addition to Obama’s Bill as more “quid pro quo” for the powerful lobbying interest of Realtors and home builders, the infamous NAR and NAHB, than stimulus.

Is this just another “subprime mortgage bubble” in the making? Instead of enticing folks to buy houses with offers of mortgage loans regardless of credit, we entice folks to buy homes with offers of tax breaks.

What’s the difference? Are we not simply mortgage the future of home owners again pinning our hopes of recovery on unsustainable, man-made pockets of demand?

$15000 Housing Tax Credit Qualifications

First lets discuss the proposal that passed the Senate, click this link to read it yourself.

2009 Home Purchase Tax Credit Basics:

    1. The tax credit is the lesser of 10% of the home price or $15,000 and is spread equally over 2 tax years.
    2. The housing tax credit can be used for purchases of primary residences only…no investment properties or second homes.
    3. The home purchase can be an existing home, a newly constructed home, or a bank foreclosure home…but the purchase must be completed within 1 year of the passage of the American Recovery and Reinvestment Tax Act of 2009.
    4. The home buyer does NOT have to be a “first time home buyer” to qualify for this housing tax credit unlike housing stimulus based tax credits from last year.
    5. This 2009 housing tax credit does NOT have to be repaid to the government unlike the $7500 first time home buyer tax credits from last year UNLESS you cease to make it your primary residence within the first 24 months (ie. sell within 2 years).

NAR and NAHB Get Payback for Campaign Contributions

Is this tax credit anything other than payback for campaign contributions?

Smells pretty fishy to me.

First, the sponsor of the amendment, Senator Johnny Isakson, is a former real estate broker himself.

Second, the NAR (National Association of Realtors) and the NAHB (National Association of Home Builders) are the always in the top 10 PACs in dollars contributed to Federal elections going back decades. And both lobbying arms spread the money around not favoring one party over the other.

That could explain why this tax credit got wide support by both Democrats and Republicans in the Senate.

Do I Care About Quid Pro Quo or Bumping the Debt $19 Billion If It Works?

Sure I care…but I’d care a lot less if this tax credit that’s costing us $19 billion actually worked!

But It Won’t!…here’s why…

    1. A tax credit is taken at the end of the year…and after spreading it out over 2 years, it’s measly little thing unlikely to stimulate anyone to do anything.
    2. The parts of the country in need of help have average home prices of $300,000 - $600,000…what’s $15,000 to them?
    3. Still too risky to buy in down parts of the country…a $600,000 home in southern California could drop in value $15,000 the first month. You can’t “stimulate” people into doing something stupid.

So in the end, the politicians can say to the lobbyists, “We tried…at a cost of $19 Billion. Give my campaign manager a call…he’s waiting by the phone.”

The taxpayers get stuck giving $19 billion away to home buyers who were already prepared to buy without the tax credit….and the parts of the country where home values are still dropping won’t get an ounce of “housing stimulus”.

Sounds like a very typical “political solution” to a market problem…

As Groucho Marx said,

“Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.”

Good Luck!

UPDATE: It read today (Feb 10, 2009) on Paul Muolo’s website,

“It appears that the $15,000 tax credit for home buyers will not make it through the House-Senate conference on the Stimulus bill and instead will be replaced by a $7,500 tax credit. The situation, to say the least, is fluid. There’s also no income limit on the credit which is for all home purchasers, not just first-time buyers. According to one estimate, the $15,000 tax credit, as proposed, would cost the Treasury roughly $19 billion over time”

I guess we’ll all have to wait and see…

UPDATE 2-12-2009:
The final tax credit allows first-time homebuyers a $8,000 tax credit which does not have to be repaid like the previous tax credit, but only for this calendar year. This only applies for people making less than $75,000 individually or $150,000 jointly. “First-time homebuyer” is defined as someone who has not owned a home for the past three years. This version of the Obama tax credit is not only reduced in the final version from the Senate version from $15,000 down to $8,000 but only applies to some first time home buyers whereas the Senate version applied to all home buyers.

UPDATE 2-25-2009:
The Treasury announced today in a press release a few more clarifying points on how to claim the $8,000 First-Time Homebuyer Tax Credit:

“The Internal Revenue Service (IRS) has posted on IRS.gov a revised version of Form 5405, First-Time Homebuyer Credit to incorporate provisions from the American Recovery and Reinvestment Act. Under the new law, qualifying taxpayers who buy a home this year before December 1 can claim up to $8,000, or $4,000 for married individuals filing separately, on either their 2008 or 2009 tax returns. Unlike the prior first-time homebuyer credit, this is money individuals do not need to pay back.

To view the form and additional information on who can and cannot claim the credit, income limitations and repayment of the credit, please visit IRS.gov”

UPDATE 11-9-2009:
President Obama signed an extension to the home buyer tax credit legislation that would have expired on November 30th. The new law not only extends the $8,000 first time buyer credit, but also provides for a $6,500 credit for existing home owners who’d like to trade up or trade down if they have owned their current home for at least five years.

This new tax credit is for homes purchased after Nov. 6, 2009 and before May 1, 2010. A buyer can close on the sale as late as July 1, 2010 as long as the contract was signed by April 30, 2010. All primary residences qualify as before but not rental or vacation homes.

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