What are the consequences?
In an attempt to push the economy ahead short term, Congress has extended and enhanced the home buyer’s tax credit. $10.5 billion was spent in ‘09 on the tax credit and no doubt at least that much will be spent on the new round pushing our national debt even higher. As we found out in the late ’70s and early ’80s, massive debt will mean much higher interest rates.
Are we willing to accept those higher rates to make things a little better in the short term or should we be taking a stand and saying no more? The consequences are all about the choices we make. Where do you stand?
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Consumerism, Geo-mapping columnist
Marketing columnist
I remember those days of 16% interest rates. My husband and I purchased a home at 11% right before that, but we did not go with the no-cap balloon loans that caught many off-guard. We and our friends were all upper middle income so we didn’t feel the effects that much. It was a much different climate then. The only credit cards people had were gas cards and dept store cards which we paid off each month. (Mastercard and Visa were just getting started.) We personally knew the bank president that granted our home and car loans. We ate dinners as a family at home with the produce we grew in our little gardens. We owned freezers that were filled with a side of beef and pork. If we couldn’t afford something, we didn’t buy it .. we actually SAVED for it. That climate was a much cheaper way to live, and most people didn’t have the “entitlement” attitude that is prevalent now. So we need to look at the whole picture of then vs now.
While the extended/expanded stimulus may not be good for the economy long-term, what real estate agent is going to advise their client to not take advantage of it “for the good of the economy”? If the program helps my seller sell their home and move on with their life, then it’s my job to promote the program to potential buyers. If my buyer can get $6500 from the gov’t – like the banks & Big 3 get – I would be remiss if I didn’t help them do that. Regardless of my personal feelings on these programs, I have a job to do. Asking a client to boycott a program for the good of the economy isn’t realistic.
On a personal level, I think all this debt is horrific!
An insolvent government leads to greater government takeover of the private sector. Is it by design or ignorance?
Elaine….well said. I spoke on the radio this week and said in the Macro sense we would pay for incurring more debt. Consumers, however should take the money!
Bob…for the idealogues in power….the means justify the end. The more time that goes by and more evidence we have….the more we know what you just said is true.
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Greg, sometimes you just have to rob peter to pay paul, and you step on mary to do it- it appears to be a reality. Is there much that can be done to soften the blow later? Nope, because one way or another we’re going to see higher interest rates, I personally believe with or without the tax credit. We’ll also see higher taxes, either with this administration or the next because peter is going to get his money.
I do believe this bailout is helping a lot of folks right now, there’s no doubt, and I wonder if it would be worse longer without it- it’s hard to tell.
Another fantastic addition.
Benn, its the cost of the credit vs the ROI. @$43k each, I have to believe there was a better way.
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Bob, no doubt, it just doesn’t make sense to me, not at all.
Well, I was not in favor of the extension or the expansion. Are they crazy up there? Look at the income limits that get a credit, even for move up buyers…A couple making up to 225K a year can get a credit? pleeeeeeeeeeeeezzzzzzzzzzzzzzzzzzz.
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Why does it cost 43K per 8K tax credit? Plain English please!
Greg – Well Spoken! I have never written a post about the $8000.00 tax credit and don’t have a count down in the top right corner of my blog. Have I written contracts for clients who have used the credit? Yes! They know about it and it’s not up to me to discourage home ownership.
There will be a price to pay for the tax credit and yes, it will fall on the shoulders of our children and grandchildren. Another point we should consider, is the unknown. How many people used the tax credit, but are not ready for home ownership. Will they be the next casualties in the foreclosure market? If they don’t stay in the home three years, will the cost of paying back the tax credit put them in bankruptcy court?
I don’t know the answers, just the questions in my head.
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Retract I did post one article about the $8000. tax credit. Just wanted to correct the error.
Dan,
Forgive me for putting words in Bob’s mouth but that number I believe reflects how much money that was spent on the housing stimulus divided by the number of buyers who participated plus the 8K back. In other words….the actual cost per first time home buyer is $43000 each.
“Why does it cost 43K per 8K tax credit? Plain English please!”
Because the vast majority of home buyers that took advantage of the tax credit would have bought a home anyway without it. Depending on whose numbers you believe, 200,000 to 355,000 people bought a home because of the tax credit. Divide that by the 10 BILLION or so it’s cost so far and you get $28K – $50K per home actually sold due to the credit.
That’s QUITE the subsidy to help the real estate market.
My kids, grandkids and great-grandkids will be paying for this.
Paula….you have hit upon a big unspoken issue that we won’t know for several years. How many of those who used the credit will either lose their homes through foreclosure or BK? I don’t know who or how these things get tracked but you can bet it is…and not by the Feds.
Jay…thanks for explaining it more precisely. To put some synthesis to this I agree that most would have already bought and those that needed the stimulus may well be those that will become the failures that Paula is alluding to.
I do not favor the credits. Most of the houses I sold in the last 6 months were to buyers taking advantage of the credit. I have talked to most of them in the last couple of weeks, and they said they would have bought anyway. The $8000 was a nice Easter egg. (and as Jay has said many times, a very poor reason to make the decision to buy a home).
I would like to see the market find its real bottom then start back with a healthy recovery. The credits are just postponing some pain down the road.
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I agree that the credit is a stimulus. Buyers that were in the market, even if only in their minds, got busy and bought a house which stalled the free fall in housing prices. The market was “stimulated”. Now, whether it needed to continue through the normally slow Winter months is another question.
As to the expansion to existing home owners, I write on my personal blog that many of the existing buyers that may want to take advantage of it probably won’t because they can’t sell their existing home without a home sale contingency on the other end. The income limits are pretty robust but the purchase price cap is a respectable $800,000 which is only slightly above the FHA limit in my area. I think it really depends on your geography as to whether this is outrageous or simply a nice perk.
I totally agree that the credit really just entices buyers that might be buying anyway to buy. That’s why it’s called a stimulus. Will it come back to bite us? I’m not so sure. Lending guidelines are so damn tight nowadays that I’m pretty sure these folks are going to be ok. Will it cause interest rate or general economic inflation? Not in and of itself. There’s plenty of other money being pumped into the system that will cause that but my guess is that State and Local governments will do plenty of taxing come 2011 and keep inflation down. After all, they won’t have the transfer and recordation fees from real estate to keep themselves afloat.
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The thing that kills me is that everyone moans and groans about what this will do to our grandchildren yet we spend as much in ONE month in Iraq (10 billion/month in Iraq alone) as we do on the entire homebuyer tax credit. And we have been doing that for some seven years. It’s a tax cut people! Since when do conservatives complain about tax cuts? A lot of the buyers don’t get money back, they just don’t owe as much! It’s good for the real estate business and I am happy it has been extended.
I still believe that the so called “cost” of the tax credit is inflated political spin. I would like to see some real numbers on that, from an unbiased source (as if there is one). What did they spend the money on? advertising? Bribing the politicians to vote for it (or against it)?
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OK, here’s my 7 cents (due to inflations, 2 cents has been increased).
If you saw my CNBC interview last week (still available at http://fredglick.com ), you would see that I called for the repeal of the credit and to take that money and earmark it for jobs.
Well, after a bit more thought, 9 more cups of coffee (no, not at one time), a little discussion and putting on my diplomacy coat, I have come up with a compromise.
How about leaving the credit as is but changing it ever so slightly:
1. Monotize it so the buyer gets the money help as direct down payment.
2. Make them pay it back, with 6% interest over 10 years.
3. Use the recycled principal and interest to help fund the new health care bill.
Now, what did we just do?
Kept the status quo of the number of buyers who would have taken the credit anyway, brought the money back to coffers (a la TARP), lowers inflation (less dollars out there) and help reduce the tax burden we may have felt and made people better so they could get jobs and buy homes!
It is government assisted capitalism at it’s best!
Call your Senators, Representative and the White House today and let them know Fred Glick sent you.