Subscribe to this BlogRealtors reap rewards from unemployment bill
The lobbyists for the National Association of Realtors sure earned their fee this go-round. Not only did Congress agree to extend through April, 2010 the existing $8,000 tax credit for first-time home buyers scheduled to expire at the end of this month, but now we’re going to all pay for existing homeowners to have a similar tax break. In the new bill President Obama was slated to sign today — the housing credit legislation was tacked onto legislation extending unemployment benefits — existing homeowners will be able to claim a $6,500 tax credit if they buy a new home they intend to use as their primary residence.
Congress also decided to swing the door wide open for more Americans to get in on both tax breaks by dramatically increasing the income limit for the credit. Individuals with earnings below $125,000 will now be eligible (up from the current $75,000 limit) and married couples that file a joint tax return with income below $225,000 can claim the credit (up from the current $150,000.) Oh, there is one tough limit: You can use the credit only for homes that cost less than $800,000. When you consider that the average existing home sells for about 75 percent less than that, and that the upper limit for FHA-insured loans in high-cost areas tops out at $729,750, the limit seems sort of beside the point.
What isn’t a small matter is whether this hit to tax revenue — the official estimate is nearly $11 billion over 10 years — is a good use of federal funds when we’re already so deficit-riddled. There have been numerous take-downs of the earlier incarnations of the credit, including the Brookings Institution’s estimate that the tax credit subsidy worked out to about $43,000 per home sale. Just last week Goldman Sachs economist Alec Phillips estimated the subsidy's price tag at north of $80,000.
Former IMF economist (and current MIT prof) Simon Johnson also recently delivered a cogent dissection of why the home buyer tax credit is a bad idea in a recent piece for The Washington Post, co-authored with James Kwak. It's a thoughtful piece that is well worth the read. A small excerpt:
"If someone could not have afforded a house without the tax credit, then what is he or she going to do when the tax credit goes away and the price of the house falls? In effect, the tax credit is a way of making houses temporarily affordable that would not otherwise be affordable, and we know where that leads."
But Johnson and other economists are no match for the NAR lobby.
To: Charley,Altadena,CA
You got it, I got it, these NAR clowns and the thieves in congress don't get it.
There are some good comments on this article. I am a realtor in Southern California and am, and have been, opposed to this tax credit. There are a multitude of reasons to be opposed with the primary one that the government has no money to do this. In a period when we are spending trillions of dollars and are mortgaging the future of this country it is obscene that we pile on. I am sure that there are many realtors who were opposed to the cash for clunkers but will accept this. We need to be consistent in our beliefs. The stimulus will do the same, draw buyers forward to buy now, and will take away from future sales. It has also contributed to siginificant price gains in properties in our area. There is one tract of homes that has seen an increase in value from $255,000 to where they are now selling for about $340,000. This is in a span of about 6 months. The loser in this is the first time buyer wanting to get in the market and who is locked out by the rising prices and competition for each home on the market. The credit is wiped out by the long term price paid for the property. One other thing, the majority of the buyers out there would be buyers anyway at these price levels, so we are just gifting the buyer with some free money. On top of this, the lunatics in Washington have expanded it to include existing homeowners. We cannot continue to spend and borrow and print money without eventually paying the price.
Why are they giving the tax credit to people who have least amount of spare inccome to buy anyway?! As someone said; What is the problem we are really trying to solve?
or is it a new problem we are trying to create?
It's almost like govt guarantee that prices will not be allowed to drop. No other country in the world makes that guarantee. Go ahead, buy without worry 
What..? don't you trust your government?
To Mark in Jackson, MI – regarding the statement that the tax credit cannot be used for downpayment. Actually, HUD allows entities (approved under Section 528 of the National Housing Act) to offer second mortgages (closing concurrently with the purchase money first)which can be applied to downpayment, closing costs and prepaids. The borrower repays the second when they receive the tax credit. This has been occuring frequently in the market since the credit was made available, and does make it possible for people who have not saved enough money for the initial investment to purchase a home.
Article author Carla Fried misrepresents how the credit works, who is eligible, and who may benefit from the program. Economic ripples from each home purchase touch multiple sectors in our economy, from service to manufacturing to retail to transportation to finance, and more. The new homeowner, the economy at-large and individuals who are touched by real estate transactions, from lock smiths to landscapers and retailers to manufacturers, all benefit. Realtors are simply one party of dozens that are positively affected by a home purchase. This program, unlike many others thought to stimulate the economy, clearly does, and for so many more than most people realize.
Anyone who thinks that the tax credit doesn't allow people to get a more expensive home (Mark, @ 12:50 pm) is utterly naive or unfamiliar with the real estate business or just clueless when it comes to human nature.
The majority of people will get as much house as they are allowed to obtain. This credit will help some people go out and buy some things for their house, but most of it will be used to get a bigger home than they could have otherwise purchased. Whether the money goes to bigger homes or home improvements, it will all stimulate the economy eventually, but the problem is we will have families in homes they really couldn't afford and that is what got this country where we are today!
The credit cannot be used as a downpayment, so I do not see how it in any way makes the home more affordable. What it is intended to do is get new homeowners to go out and SPEND the $8,000 on new items like appliances, tv's & everything else that stimulates the economy. Raises in consumer spending makes the stock market happy. In an area as hard hit as mine, getting people excited about buying homes is paramount. Get off your negative & jaded horse Mr. Johnson…
RE: It is because the Realtor will tell the buyer "Don't worry about spending all your take home pay on the house payment, your pay will be reimbursed by the Federal Government to the tune of $8,000. I've been told that by a new home manufactures finance person. I walked and continue to rent. Tax laws change!
The realators, along with sleezy lending practices are the cause of the problem in the first place. When you go in search of purchasing a home, the realators maneuver you toward homes that are above your means. Having moved a good number of times, I learned that very quickly and instead of using a realator, I went in search on my own and found a home I could afford. The real estate industry benefits directly from the government measures because it tends to keep home prices inflated. It's interesting to note that realitors are viewed by a majority of people as dishonest and greedy, and for good reason. Just recently, a Century 21 office in our area went broke and who do you think the owner of the facility listed with? "For sale by owner." He's no dummy.
Yeah really, this won't cost the taxpayer as much as not doing will. Your quoted economist is wrong. This money goes right back into our stagnant economy helping to generate more spending and more income, equals more taxes paid.
About time we got a bailout rather than Trillions to foreign and domestic so called "investment" banks.
WHY DON'T PEOPLE GET IT. Higher prices–artificially driven by low interest rates and tax credits–are not good for anyone. We are working ourselves to death to pay these artificially inflated prices. PLEASE LET HOME PRICES NORMALIZE. When two people have to work overtime to pay for housing, who spends the time necessary to properly raise their children.
The credit will stimulate demand. This increases prices. Suckers will buy at the high prices then when the credit expires their house prices will fall, they will be under water, and we will have more risky loans on teh books of banks.
Yes, the economy will be stimulated by the new owners' spending at Lowes and Sears. But it will be at the new buyers' expense. They will lose in the long run.
Don't get sucked into buying just because you get a credit!
As for "the only ones really benefiting are the realtors" comment…this is laughable.
As for this allegedly objective comment coming from a REALTOR(tm)…now that's laughable.
Of all the many hands that dip into a transaction, the REALTOR(tm) commission is by and large the biggest bite. Those $50 "courier fee" and other junk fees aren't going to bring back the economy any time soon. $15K towards a new Mercedes for the broker is another matter.
And exactly how much of the federal handout are these cash-strapped new home "owners" going to spend on upgrades versus how much they'll be spending just to make the payments?
More good money after bad. But it does buy votes for Obama and Co.
What I don't get is why they are so hell bent on propping up the housing market when there are millions of people who find the prices still unaffordable and would equally benefit if the prices came down. Taxpayers will save a bundle in the bargain. Nuts ..absolute nuts I tell ya.
I think this whole place here in the DC Metro area is totally out of whack. We really do not need more tax credits, handouts, cash for clunkers, government contractors, and deficits. Perhaps maybe doing a little bill paying to our debtors(mostly abroad) and saving money would be a good thing. But what do I know, I just one of the morons working a business for a living. Welfare baby, maybe we should join the section 8A club here in DC.
At the end of the day, I struggle with this as well. I am an owner of a real estate firm, and clearly, the stimulus has helped our market. However, as a small business owner, I am fundamentally against handouts. The real question is how the home buyer uses the tax credit. If they save it, I am in favor. If they spend it without regard, I am opposed. If Americans will strengthen their family fiscal health we will get thru this mess, even with the inevitable weakening of the dollar.
Why does Johnson assume that only those who can't afford to purchase would indeed purchase because of a tax credit. In my view, it more likely acts as a push for those qualified buyers on the fence. I think this is the more reasonable view.
As for "the only ones really benefiting are the realtors" comment…this is laughable.
If you look at a settlement statement for a real estate transaction you would notice how many people are affected by the transfer of property.
There are many affiliated industries that also receive a boost including home inspectors, electricians, roofers, foundation companies, HVAC companies, landscapers, etc.
The tax credit funds are almost immediately liquidated into the economy. Whether that be new appliances at Sears, a new roof, material from Lowe's, or just hiring a local landscaper it is easy to see that many more people benefit from this tax credit than "the realtors".
Why are we tacking on billions more in debt on a program that should have been part of the original "stimulus" program in the first place. Had the Democrats worked with the Republicans in the orignal bill there would have been a $15,000 tax credit for all home buyers as part of their initial stimulus proposal.
Redirect some of the current money allocated before more is wasted to fund this initiative. Instead we are sitting here still having billions spent on paying back the people that elected you. It is apparant that the lunatics are now running the assylum.
It's pretty obvious there are some real estate shills in here. If you can't recognize that this multi-billion handout is a expensive attempt in order to make folks buy a new house, you are financially inept and clueless. It's as simple as that.
My family and I will benefit from this program. My husband has been working since he was 16 (he's now 53); I have been working since I was 16 (I'm now 41) and we have paid our taxes diligently every single year. We are covering our own downpayment AND closing costs. What this will help us do is take this money and put it back into the economy via home improvement projects. I don't feel guilty capitalizing on this program. I have never owned a home and it's been 15+ years since my husband last owned. We've paid into the system over the years while everyone else was benefitting from the money we were paying. I see this as finally an opportunity for it to benefit us.
I'm buying a house anyway, tax credit or not. Made no difference in my decision, but since I meet all the requirements, the $6,500 tax credit will be icing on the cake.
James Kwak is 'on the money'.
Buying now to get the $8k is a trap. If you just wait a year, the purchase price will drop more than $8k, and that's money in your pocket, plus lower monthly interest payments forever.
Prices are still falling about 15% per year, and they will fall until they hit 3 – 4 x annual incomes ($120 – $160k house prices vs. $40k annual incomes), which puts the stable price at about 1998 levels. We'll get there in about 2014, after a lot more mortgage resets and defaults.
I feel sorry for people who walk into this trap … if you must buy, bid low on the offer and haggle, drive a very hard bargain.
The thing about the home buyer tax credit that the politicians will not say out loud is that it is the way to give something to the good actors after having spent so much on the people who caused the mess we are in. Think of the 700 billion for TARP, hundreds of billions more for AIG, Fannie, and Freddy. While some of that money has been paid back, not all will come back, and think of the interest on the money borrowed to fund these bailouts too. Then there is the billions flushed down the toilet on well intended forclosure prevention efforts. If the modifications work or not, We the People will not get any of that money back. So lots has been spent on the irresponcible.
With the Fed buying up trillions in mortgage securities and Treasury notes, interet rates are at rock bottom so current homeowners can refinance and save themselves a bundle. But the people who saw prices get to stratospheric levels and knew they could not afford it without the toxic loans stayed in rentals, facing higher rent as property values skyrocketed. The first time buyer credit was the way the Congress opened up the public trough to the resoncible who had not benifited already. All this money will have to be paid back by higher taxes on We the People, but at least now all have had an opertunity to drink at the party before we all feel the hangover yet to come.
As a staunch opponent of marginal tax rates on higher income, I also did not think income limits on the first time buyer credit were a good idea. But I think Congress went too far in making a credit for existing homeowners to trade up. They already have been able to benifit by lower mortgage rates to refinance, and more first timers help them sell if they need to.
Well, Mr. Johnson clearly clearly doesn't seem to understand this program, as highlighted by his comments: "If someone could not have afforded a house without the tax credit, then what is he or she going to do when the tax credit goes away and the price of the house falls? In effect, the tax credit is a way of making houses temporarily affordable that would not otherwise be affordable, and we know where that leads."
The credit cannot be used as a downpayment, so I do not see how it in any way makes the home more affordable. What it is intended to do is get new homeowners to go out and SPEND the $8,000 on new items like appliances, tv's & everything else that stimulates the economy. Raises in consumer spending makes the stock market happy. In an area as hard hit as mine, getting people excited about buying homes is paramount. Get off your negative & jaded horse Mr. Johnson…
Simon Johnson is absolutely right. We, as a country, can't afford to be subsidizing home buyers, first time or otherwise. Since this decreases the amount of revenue the feds need to pay for all of this stimulus, treasury will just issue more debt to cover it. The only ones really benefiting are the realtors.
The real beneficiaries are those who can afford to buy a house, ie those who have a job and money for down payment. This really doesn't help those on the lower end of the income spectrum, unemployed, etc. Opening up the top end only exacerbates that gap. What is the problem we are really trying to solve?
Cry more please. 11B is a drop in the bucket and is not a handout to Realtors. They still have to work to get the business. While it is clearly obvious that the tax credit affects a small number of overall transactions, it is disingenuous to assume that this is all about Realtors.
As you point out, the tax credit didn't even help that much. So, why would the NAR care if that were the case? Obviously, they would not. Set your sights elsewhere. Nobody is going to make much money off of this extension.
It is your money so use it while you have the chance!!!!! If you are in a position to purchase a home it means you have had a job for a while and probably paid much more than 8K in taxes. Just use it and who cares where you spend it! IT IS OUR MONEY, NOT THE GOVERNMENT'S!!!!!