The homebuyer tax credit has been extended. Homebuyers now have until September 30, 2010, to close on their purchases after a late night deal passed by the Senate. The bill now goes to President Obama who is expected to sign it into law.
An extension had been proposed months ago but the measure failed to be passed until it was separated from a larger bill. Under the latest version, homeowners must have entered into an agreement to buy a new home by April 30, 2010, and have until September 30, 2010, to close on the deal. The original closing deadline was yesterday, June 30, 2010. The extended deadline does not affect the criteria for the credit; it otherwise remains the same.
The numbers of taxpayers who might be affected by the extension have varied wildly. Initially, reports were that 80,000 taxpayers might lose the credit because of difficulties closing due to obtaining a mortgage (!) and old homes that were slow to sell. However, CNN is reporting that the number is 200,000 because of the number of short sales. A short sale tends to happen when the sale price of a house is less than what’s owed on the property (for example, a house sells for $250,000 but the seller still owes $300,000 in mortgage). The difficulty tends to be that the seller is not released from the liability for the mortgage but the lender is hesitant to remove its lien/obligation on the property from the property (mortgages tend to travel with the property, not the person). As a result, it can be expensive and cumbersome to work out a deal. It can also, depending on the circumstances, create a tax liability for the seller.
I haven’t been a fan of the credit since it was proposed in 2008. We’ve been attempting to “right” the market with artificial incentives for three years and there’s no real evidence that it’s working. Proponents of the extension have claimed a number of “wins” when the market has spiked (although much of that can be attributed to seasonal, not tax, boosts) but the real numbers attributed to the credit have been soft. There has also been massive amounts of fraud perpetuated on the system using the tax credit.
Nonetheless, there are some powerful lobbyists out there who want to see the homebuyer’s tax credit extended beyond September or possibly even made permanent. More housing data will be out this week. I’m sure we’ll hear dire predictions about what will happen if we don’t give buyers a reason to buy… With elections not so far away, keep an eye on this one. I can’t think of a better way to build another housing bubble. Sudsing up, anyone?
I think the fear of another housing bubble is exaggerated. The housing market is so far down the toilet that even a “permanent” buyers’ credit won’t do much to create another “bubble”. The median price of a house in the US right now is about $180,000. The $8,000 credit would be a 4.4% discount; the $6,500 credit would be 3.6%. These are not the kinds of “discounts” that send throngs running out to buy.
As for the acdtual effect and “usefulness” of the credit, it’s a little better than a wash. Lots of people were thinking of or planning on buying a house anyway; they just got it done early to take the credit. An obvious reason why May housing sales took a plunge. Buying a house is not like buying peanut butter (oh boy — half off, let’s stock up!). It’s a huge investment, and one that a lot of people just can’t afford, tax credit or no. Perhaps the most significant effect of the tax credit, temporary or permanent, is that it enables some marginal buyers to afford to take the plunge. These relatively few households would not be homeowners without the credit. Does that make it worthwhile? Probably not.
I’ve said it before, I’ll say it again, if they are gonna keep extended or renewing or bringing back the tax credit, they may as well make it permanent but please redesign it.
Come up with a perminent tax credit that is scalable to income and price of home. Something like if you make less than $50K, you get $8K as long as you don’t purchase anything above $300K. If you make a little more, you can purchase more but you get less back. The idea being to make sure only people who can afford the big ticket homes buy the big ticket homes.
And instead of paying out cash, how about they can only use the money for true home improvements or toward their property tax or mortgage?
This is the biggest waste of money. Don’t get me wrong, I’m going to benefit from the extension, and who doesn’t like free money? But this is just a giveaway to people who have already purchased a house, knowing there was a good chance they wouldn’t meet the deadline to collect the $8K. This stimulates nothing. It’s bills like these that give government a bad name. And lest someone make the argument – it doesn’t make homes more affordable to more people. By now, sellers know buyers are getting $8K and adjust their selling prices accordingly.