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Speculation Heats Up on Home Buyer Tax Credit Extension

Speculation Heats Up on Home Buyer Tax Credit Extension


Mitchell C. Hochberg

It will be an 11th hour decision. That means the waiting game will go right down to the final few minutes on April 30.

The waiting game?

Will the current $8,000 tax credit for first-time homebuyers and the $6,500 tax credit for second-time buyers end 12 days from today - and how will that termination affect the health of the nation's housing market?

  • It's a toss-up, say pro-tax credit-leaning advocates. But the program will continue through the end of this year, or at the least, for another six months, they maintain.
  • It's a done deal, argue anti-tax credit extension forces. The program will end.

Those are the conflicting views Real Estate Channel has encountered in attempting to see how the industry expects President Barack Obama and his administration to decide the question.

One industry professional, however, is going out on a limb with the pro-tax credit extension group.

Mitchell C. Hochberg, a principal at Madden Real Estate Ventures, LLC in New York City, tells Real Estate Channel:

"Congress will extend the credits to mitigate the impact of two recent events:   The Federal Reserve ending its program of buying mortgage backed securities and the recent rise in mortgage rates (30 year fixed rate mortgages climbed to 5.31% from 5.04%) both of which will have a negative impact on home sales."
Termination date is April 30. The eight-month program, first announced in February 2009 and scheduled to end Dec. 1, 2009, was extended in November 2009 to April 30, 2010.

The positive effect of the program has been record-shaking.  Depending on which trade group you prefer to believe, all of them agree that about one million homes have been sold to date, largely due to the tax program.

Naysayers of the program argue it will end April 30, mainly because the U.S. Central Bank ended its $1.4 trillion investment into purchasing mortgage-backed securities on April 1 of this year.

But proponents of the program, including all of the Washington, DC-based trade lobbyists, brush that argument aside.

Instead, they maintain the program will be extended because it could prove to be a smart political move in this election year.

So far, however, the rumblings haven't been loud on Capitol Hill. But they will be as the April 30 deadline approaches, industry watchers say.

In the past 18 months, the big guns for the initial and extended programs have been Sen. Bill Nelson (D-FL), Senate Majority Leader Harry Reid of Nevada, Senate Finance Committee Chairman Max Baucus of Montana and Sen. Johnny Isakson (R-GA).

Isakson especially was in the forefront of the last program extension.  He wanted the program to be extended through Dec. 30, 2010; double the credit to $15,000; and remove restrictions that prohibit individuals who already homes or earn $75,000 to $150,000 for couples, from getting the tax break.

Isakson's bill was shot down in a close Senate vote, 50 to 47 in August 2009.


Sen. Harry Reid

The two biggest housing grade groups, the 1.2-million-member National Associations of Realtors and the 800-association member National Association of Home Builders, had also favored expanding the credit to $15,000 at that time.

Failure to extend what may be one of the most effective pieces of the Obama administration's 3009 stimulus legislation would cost jobs, economic growth and tax revenue, the housing groups argue.

There has been no official comment from Obama.  However, when the current program extension was being debated in November 2009, the President's press secretary, Robert Gibbs, told the media Obama was "evaluating the impact" on new home sales.

Lawmakers are under pressure from real estate agents, mortgage brokers, title settlement offices and home builders to extend the program.

However, lawmakers are also facing pressure from governance groups and recent IRS reports claiming widespread fraud around claims for the $8,000 and $6,500 tax credits.

According to published reports, the IRS has identified about 75,000 claims totaling almost $600 million that may not be from first-time homebuyers.

They also found that about 600 taxpayers under 18 years old and ineligible to buy a home claimed almost $5 million in credits.

Two key related questions are also part of the program extension debate.  They are:  Will mortgage rates rise and will the housing market thrive or fall after the program ends?

Industry experts say the answer to the first question is easy - mortgage rates already are rising from the 5 percent level they have been at for the past 18 months.

The answer to the second question continues to remains debatable and will vary from market to market.

For example, a quicker recovery than in most of the nation is being forecast for the Philadelphia-Baltimore-Washington, DC corridor. That's largely because of the heavy presence of a government-employee and military population, according to several brokers.

The Minneapolis-St. Paul market is also healthy but only because of the tax credit programs, points out Tony Maurer. President, St. Paul Area Realtors Association.

"The programs helped prop up a sagging housing market," Maurer says in published reports. "There is no question that the First Time Homebuyer Tax Credit, as well as the federal government's purchase of bank securities has stabilized the marketplace.

However, Maurer says, "It is an unknown that at the conclusion of the tax credit program, what we will see from the marketplace standing on its own."

Maurer's counterpart across town, Brad Fisher, president, Minneapolis Area Association of Realtors, speculates interest rates could continue rising, once the tax credit program ends.

"I think we will have to get through the April 30 deadline for people to buy homes and then we will have to see the demand after that, because that will have a bearing on where our interest rates go," Fisher says.

Bloggers have had a field day speculating on the tax credit extension possibilities.

A blogger who signs himself only as Jayson of NHS has been noteworthy for his six-pronged thesis on why the tax credit program should not be further extended.  He says the government "should let the tax credit expire and (allow the housing market to) get back to basics."

He says:

1 - We can't afford anymore tax breaks - Our government has had a budget deficit every year since 1969; that means we've spent more than we've brought in for nearly forty years. In 2008, we spent $451 billion on interest payments, that's $37.6 billion a month or $1.24 billion every day - an absurd amount of money. We need to stop spending and start paying down our debt.

2 - The government needs to get out of the market - We offered a tax break and it did sell some homes, but all things come to an end. It's time to get the government out of the market. We need to see where housing is on its own so we can have a real look at where we stand. Companies don't hire employees based on incentives and investors don't invest in industries that are temporarily subsidized.

3 - Tax breaks help people afford a home - People that can't afford a home shouldn't own a home - it's as simple as that. It would be nice for everyone to enjoy homeownership, but it's just not plausible. Take the last four years for example, during the early part of the decade lenders and the government offered homeownership to everyone and the end result was economic catastrophe.

Sure, there were several other factors that contributed to the global recession, but getting people into a home that they couldn't afford was a major factor. The tax break is just one more thing that might help get someone into a home they can't truly afford, one more thing that helps create false demand, one more thing that may get us back to where we were a few short years ago.

4 - Some first-time home buyers don't need the tax break - The tax break has no income limits,  meaning all first-time buyers qualify for the tax break whether they need a break or not.

"The rich qualify for the tax break, just the same as the unfortunate. There are income limits of $75,000 for single taxpayers and $150,000 for married couples filing a joint return.

"In some cases, we're giving an $8,000 tax break to buyers that don't necessarily need it, buyers that would buy either way. Is it fair this way?  Yes.  Is it a waste of money? Yes- we waste too much money. I'm positive $8,000 can be used elsewhere, like to pay down our debt.

5 - First-time home buyers aren't the only home buyers - Currently, only first-time home buyers qualify for the $8,000 tax credit. In a normal market, first-time home buyers make up a small percentage of all home sales.

"If the goal is to stimulate sales, let everyone, including investors, benefit from the tax break. Extending the program's reach would certainly bring the program's price tag up, but it would do wonders for demand.

"If we're going to get the government involved and offer a tax credit to increase demand, why not make it more effective and fair?

6 - An extension means more of the same - At some point, if the government does decide to extend or implement a new tax credit; we'll have to endure more of all of this. More waiting to buy until we hear about the tax credit and more plans, voting and bickering about what to do.

"These tax credits take our politicians away from doing what's most important, balancing our budget. If our budget doesn't get under control, an $8,000 tax credit will be the least of our worries.

"Haven't we had enough of the same? Let's not vote on spending more, it's time to change, let's start voting on how to save more."

Jayson of HNS adds, "In a debt free America, I'd be 100% for extending and even increasing the $8,000 tax credit for first-time home buyers.

"Unfortunately, America is $11.8 trillion in debt. Tax breaks and gimmicks like cash for appliances meant to temporarily increase sales need to stop. Sure, some of these strategies help stimulate sales, but the sales are temporary and they do little to help the economy in the long-run.


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