Making The First-Time Buyer Tax Credit Better — Or Worse?
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There is now a new effort on Capitol Hill to increase the first-time buyer credit from $8,000 to $15,000. Under S1230, first-time buyers would be able to get a credit equal to as much as 10 percent of the purchase price, up to $15,000.
Not only that, but the time the home would have to be held would be reduced from three years to two years.
This would be a fabulous — with two huge caveats — deal for first-time purchasers. The caveats? It stimulates the wrong side of the marketplace and it costs Uncle Sam too much.
More Inventory
The biggest problem we have in real estate today is too much inventory. There are too many homes for sale, especially too many foreclosed homes for sale by lenders. Home prices cannot stabilize much less rise until we get rid of our excess inventory.
Thus, the problem with the $8,000 credit that we actually have for first-time buyers and the $15,000 credit which is being proposed is that they can be used to buy new homes, homes which do not yet exist. And what’s wrong with that? New homes are additions to the housing stock, they are more inventory — the very thing we don’t want.
The conflict here is that the home building industry has taken a beating in the current recession. It would generally be good policy to help that industry and put people back to work. But what would normally be a good idea simply clashes with the need to cut the stock of homes, not add to it.
Taxes
Republicans and conservatives have been screaming about the cost of bailing out Wall Street, costs made necessary by the failure to regulate banks and real estate brokerages under the Bush Administration. If you can get past the politics and the denial of responsibility, there is cause to worry about increased government spending. Given a $15,000 grant to every qualifying first-time buyer also means that other households will have to pay the tab.
The $15,000 credit has some bipartisan support at this moment, but you have to wonder how many additional homes would be sold. Some percentage of first-time buyers are going to purchase homes anyway, especially with the $8,000 credit which is now in place. In effect we would be giving those buyers an additional $7,000 for doing what they would have done anyway. As to whether we will also have a sufficient number of additional sales to justify the cost of the new program, that’s unknown — you can always find an economic study to support any view you prefer.
If the $15,000 proposal becomes a big deal in Washington, if there is a lot of debate and noise, then savvy buyers are just going to sit back and wait for such a proposal to pass. In the meantime, home sales will lag, inventory will build, and there will be great pressure to knock down home prices. If the bill does pass qualified buyers who wait will be rewarded while sellers will be hurt. If it does not pass, then huge numbers of sales will be lost for nothing.
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