If you’re opposed to extending the first time homebuyer’s credit (I am), you’re probably in the minority. And you’re definitely not in the Senate. The Senate voted unanimously to approve the bill and the House is expected to follow suit (at least the approval bit).
Under the new law, the first time homebuyer’s credit would be extended to April 30, 2010 to sign a contract to buy a home and another sixty days to close. *Whew, just in time for the November elections.*
The bill also extends the credit to homeowners who have lived in their current home for five of the last eight years – those folks get a reduced credit of $6,500 for homes purchased after November 30, 2009 (but before the April deadline).
Additionally, income caps were raised to $125,000 a year for individuals and $225,000 a year for married couples.
Raising the income caps? The only sensible part of the plan.
The new law will cost taxpayers about a billion dollars a month. Yes, a billion.
According to a recent report released by Goldman Sachs economist Alec Phillips, all but about 200,000 of the 1.4 million first-time buyers who claimed the first time homebuyer’s credit in 2009 would have purchased a home even without the incentive. The cost to taxpayers? $8.5 billion. If you do the math, that means that the real “cost” to taxpayers for increasing home sales is about $42,500 per home. Let that sink in for a minute.
Goldman Sachs also estimates that all of that money only resulted in boosting prices by 5% – and that includes the idea that sellers increased their prices in anticipation of the credit, something that I was concerned about (you may recall that I wasn’t a fan of the bill in the first place).
I don’t think anyone will argue that the bill did nothing. It clearly did something – at least 200,000 felt compelled to buy under the plan. But I am concerned about the cost. I don’t think we can fix everything by throwing more money at it (except maybe baseball but that just makes me sound like a bitter Phillies’ fan). I guess I’m oddly more laissez-faire than Congress (who’d have thunk it?) but *gasp* what about the notion of letting the housing market right itself? We’ve had two years of housing credits (yes, there was a stimulus credit in 2008) and now we’re pushing off to 2010. When does it end?
You know what they say in Congress, if it’s not broke (enough), keep trying until it is…
So, with that in mind, Senate Majority Leader Harry Reid (D-NV) has announced an extension of the first time homebuyer’s credit.
Despite evidence that the credit has been used inappropriately – and perhaps criminally – lawmakers have agreed to extend the credit through the end of April. In addition to the expanded credit for first time homebuyers, a reduced credit of $6500 would be available to home buyers who have been in their current residence for a consecutive five-year period in the past eight years.
Income limits under the new bill would be increased to $125,000 for singles and $250,000 for couples, from the current $75,000 and $150,000. The credit phases out for people making more than those amounts.
Does that cover everybody? Does everyone get a tax credit now? Cause we wouldn’t want to be handing out that free money and leave someone out.
And the National Association of Realtors? They’re sleeping well? Good.
But just to make sure it passes, the bill is reportedly being tacked on to a measure that would extend unemployment benefits. Of course. Because nobody would vote against the jobless.
Sheesh.
Information involving potential fraud with respect to the first time homebuyer’s credit continues to make headlines. After initial reports that over 100,000 refunds were perhaps inappropriately distributed, the IRS has released more data about fraud relating to the credit.
Officials from the Internal Revenue Service testified before Congress that as much as $600 million of taxpayer credits are “suspicious.” Of those, the IRS suspects that 73,799 claims totaling almost $504 million appear to have been distributed to individuals who would not qualify as first time homebuyers. And – wait for this one – 582 taxpayers under the age of 18 years old, including several 4 year olds, applied for and received the credit. The legislation does allow for minors to apply for the credit but as young as 4? That seems to indicate some kind of attempt at income shifting or other manipulation from parents who were ineligible for the credit.
And it gets worse. More than 19,000 taxpayers have been identified as making application for the credit for properties that were not even purchased in the first place. Nearly 74,000 taxpayers already owned a home, apparently under the impression that the “first time homebuyer’s” bit didn’t apply to them. Many were over the income limit or applied for more credit than they were entitled to received.
Over 3,000 taxpayers did not file with a Social Security number, using an ITIN instead. The IRS issues ITINs to individuals who need a taxpayer identification number but who are not eligible for a Social Security Number. Both resident and nonresident aliens are eligible to apply for an ITIN but the numbers of taxpayers with ITINs claiming the credit has lead some to believe that significant refunds were paid to those illegally living in the country and not eligible for the credit.
All honest mistakes? Not quite. The IRS has flagged at least 8,000 claims for criminal fraud. Currently, 115 are under investigation as criminal cases.
Despite all of the bad news, realtors and not surprisingly, bankers, want to extend the credit. Some on Congress seem to agree including Sen. Johnny Isakson (R-GA), who wants to expand the credit to dole out refund an additional $17 billion. Billion.
However, the White House is not as positive. Treasury Inspector General J. Russell George said, “Based on the administration of the credit today, I am very concerned about the IRS’s ability to effectively administer the credits that are claimed before the Dec. 1 deadline, let alone any credits that may be claimed within future extended deadlines.”
In response, the National Association of Realtors had this to say: “Without congressional action now, the market and our national economy may freeze again — possibly as soon as this month.”
Which begs the question: why not watch and see? Is it possible that a market solely driven by government incentives to buy isn’t a real market at all? Fraud notwithstanding, is the credit just creating false demand or accelerating existing demand? If we give an incentive to buy today instead of tomorrow, who buys tomorrow? Do we keep incentivizing until we can’t stop?
This worries me (yes, I’m channeling a little Tim Gunn here). I’m not really a fan of tax policy solely to manipulate behavior in the first place (home mortgage interest deduction, for example). But once you start, how do you pull the plug?
Soooo… You know that I wasn’t a fan of the first time home buyer credit. It was touted as a “stimulus” for middle class taxpayers to make home buying more affordable. The idea was that folks would rush to buy homes, thus buoying the housing industry, getting banks going again and more or less saving the planet. At least that’s how I remember it being pitched.
Initially, it was all good news related to the credit. After the IRS paid out nearly $10 billion to 1.4 million taxpayers, Moody’s Economy.com chief economist Mark Zandi reported that almost 400,000 new and existing home sales were attributable to the tax break. So good. Only, the report went on to say that some of those home sales were actually attributable to being “stolen from future demand” meaning that taxpayers simply had an incentive to buy now as opposed to later. The suggestion is that the housing market will slow post-credit (indications are that it’s already happening).
Despite the slowing, the credit did some good even if it was financed by the Treasury. So, of course we should extend the credit, since it’s so great and all, right? I mean, that’s what Congress is saying. For example, Senate Finance Committee Chair Max Baucus (D-MT) supports a three-month extension of the credit and similar bills are pending in the House.
Maybe not so fast. The IRS announced earlier this week that it is investigating more than 100,000 “doubtful claims” related to the credit. In fact, to date, the IRS has instigated 107,000 civil claims related to the credit – about 8% of the taxpayers who’ve applied for the credit. A quick turn of the math shows that to be up to $800 million in potentially false credit.
It’s not all individual fraud, either. According to a House Ways and Means oversight committee, the IRS is investigating 167 “criminal schemes” involving the credit.
And that’s just in the early stages of review.
Sheesh. I figured that what would really happen is just that it would nearly drain the Treasury and perhaps artificially push up home prices. I clearly underestimated the efficacy of the criminal mindset.
(Hat tip: Kay Bell)
