Tuesday, November 24, 2009

Why We Should Sunset the First Time Homebuyer's Tax Credit

Borrowing heavily from fellow blogger mintznathan:

The First Time Home Buyer's Tax Credit is one of the numerous half baked provisions written into the Stimulus that was Rahm-rodded through Congress earlier in the year. It's basic premise is to provide an $8000 tax credit for first time home buyers (defined as anyone who hasn't owned a house in the last 3 years) in order to stimulate demand for housing.

Sounds good on paper right? Unfortunately, it follows the same twisted logic as "Cash for Clunkers" - using modest government tax incentives to try to "front-load" future consumption into the present. As we recently saw with "cash for clunkers",this increase in immediate demand generally results in a terrible hangover after the incentive is removed. Further, since the incentive is to buy big ticket items like cars which are purchased on credit, this only further serves to lever up American families that should be paying off debt rather than going further into it.

The artificial demand is keeping real estate prices propped higher than they should be at this point. If they were allowed to fall to real market levels, not "meddled-with market levels", we would see lower home prices, lower land prices, and lower interest rates. Yes the incentive makes more people jump up to buy homes; if this demand were allowed to slow down, mortgage companies would compete more zealously for the smaller mortgage pool. How would they compete? On cost, of course: Interest rates and initial fees. Why are home mortgage rates still at 5% or more when the Fed is charging nominally zero for its money? The answer is that mortgage companies and banks know they can get away with it because more people are in the market because of the tax credit. So the tax credit has the effect of raising real estate prices and mortgage interest rates across the board.

And what also happens when your home is re-assessed at this (artificial) higher value? Your house valuation increases and you get to pay more taxes.

Not to mention that not everyone needs or wants to be a homeowner.

This provision was expected to expire at the end of the year. But now there are signs that Senator John Cornyn (R-Texas) may be willing to join with Democrats to extend this very expensive ( $45 billion/year) tax credit. He declared his support for extending it on ABC's This Week, this morning (October 4th).

Obviously, extending this market-meddling "incentive" only prolongs the inevitable correction of housing prices that has to occur. Further, it will distort supply/demand unnecessarily in areas that experienced minimal impact from the housing bubble (like Vermont or Texas) - creating mini-bubbles wherever the big bubble didn't burst.

In the spirit of holding both sides of the aisle accountable to principles of fiscal responsibility, Senator Cornyn's office received the following message this evening. We urge you to contact his office here and do the same

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