$8,000! $8,000! Anyone want $8,000 today? Well, if you are a first time home buyer looking to purchase a home this summer the government is eager and willing to give you this money. The government through the American Recovery and Reinvestment Act of 2009 has provided tax credits for first time home-buyers to receive an $8,000 tax credit when purchasing a home. The question now is: should this law still be around?
Here are the 10 things that every homeowner should know about this law.
5 Positives
1.The tax credit has been used before effectively. According to Congressman Johnny Isakson, GA (C-Span 2-24-09) this is not the first time that the United States has used a tax credit to spur home ownership. According to Mr Isakson, “In 1975, the Democratic Congress and a Republican President, Gerald Ford, came together for the American people and passed a $2,000 tax credit for the purchase of any standing, vacant, new house and in one year’s time a 3-year inventory had been dissipated to 10 months.” What does this mean for you today? The last time this credit was enacted, home values were restored. Now I am not guaranteeing this now, however, since this is the evolution of mortgages, I argue that history can repeat itself. When housing inventories come down that will allow for home values to rise, meaning that take the opportunity that comes once every generation and buy a home now at historic lows before the chance is gone. Get qualified for a mortgage, and start looking at quality homes to plan your financial future.
2. $8,000 is a lot of money. Having that type of money available on a $200,000 home means the ability to recoup your down payment. For example, when you buy a home FHA, your down payment is 3.5%. That means you need $7,000 to put down on the house, and that does not even include the closing costs. That is huge that you can get a refund on your entire down payment, because as you will see in the next item that money is greatly needed.
3. People do not have a lot of extra cash anymore. The challenge has been over the past 20 years, our eyes have been bigger than our wallets, as the level of our debt balloons to unseen levels. That means, most Americans do not have $8,000 in savings. What they have is $8,000 in credit cards, and sometimes more. We have become a land of debtors. The challenge is that giving someone $8,000 requires them to take on the biggest debt of them all: a mortgage. So my thought is better to replace their credit card debt with a housing debt. The reason is obvious: Credit cards will never make you money. Your house on the other hand will not only provide you shelter, it can be sold or rented (although not for 3 years if you want to keep your 8 grand),
4.This helps sustain housing prices by providing incentives for people to buy now, which increases competition. The old supply and demand model. Get more people to see a home, and you will get more bids. That has been repeated on a large scale with the American Recovery and Reinvestment Act. Additionally, many people are able to now finally get the home they have always dreamed about, because of what the tax credit will mean for their budget and finances. This alone is invaluable, because it states that the American Dream is alive and well!
5. This is a great way for investors and developers to unload properties that are ready for market. Additionally, I like the fact that as an investor I have now added to my buyers pool. As I stated above, more buyers, equals higher purchase prices and more homes for me to sell the homes that I buy and rehab. Doing an investment project and not having a buyer is a risky proposition. That is why having the tax credit does help out investors in the selling side.
Challenges
1. We have spent too much money on housing stimulus already. When the word trillion dollars and government comes up, you know there are some things that have gone seriously wrong. Take for instance all of the bailout money we gave to the largest banks and insurance companies. Billions of dollars that will now become interest that we have to pay on for years to come. The united states is a debtor nation, and for them to go that far in debt scares people. Adding to this debt will detract other countries from helping us, and getting their money sucked into the vortex that was currently the United States.
2. This will not work in the long run until jobs come back. While there was some improvement for the first time since, March, 2008, having an unemployment rate of 9.4% is too high. When roughly 10% of the country is out of a job then we have some serious challenges facing our country that no housing incentive will help. From the looks of this economy, I believe that jobs will come back in 2010. When that happens the real estate market will normalize. Until that happens, we should not be promising anyone a real estate recovery, because the $8,000 tax credit is not sufficient to get us over the hump, nor does it add to other government recovery programs.
3. This does not stimulate the economy, which has become the main challenge with sparking the housing boom. When the government gives out money for various programs, such as unemployment, social security, health care, etc they know that the money they give out will be amplified by it being reused throughout the economy. Huh? A senior citizen gets their social security check for $500. They now have money to buy food. They go to the grocery store, purchase $50 in food. At the checkout line, the cashier takes her money, and the bag boy brings her food out to her car. Repeat that process thousands of times, and what you have done is create an income for the cashier and the bag boy. They now have money and can buy food, clothes, housing, etc and the process then repeats itself. The challenge is that the money for the stimulus program mainly goes to replacing the savings that were lost purchasing a new home. Some might go into paying off credit cards, but by and large the money does not go into growing the economy, just sustaining it. We need growth measures at this point, so we can lower the 9.4% unemployment rate.
4. Prices are already inflated without the government stepping in. When the bust hit in 2007, prices in the hottest cities, like Vegas, Miami, and Phoenix had seen such exponential growth that the prices on a home far outstripped the prices that you would pay for renting a home. While the nation lost about 30% of it’s home values, since then the prices of homes has become more level with rentals. At the same time, putting more demand in an overtaxed market is like putting gasoline on a burning man to douse the fire. The market has not fully allowed people the chance to purchase homes they can afford. While that hurts those bought the homes prior to 2007, it is simply economics at work. People need to be able to afford their homes, and giving a tax incentive is not a long term solution for being able to afford your mortgage.
5. On a personal note. I am an investor. I feel that as an investor, my peers and I buy as many and maybe even more homes every year than first time homebuyers. Why do they get all of the money? Every time I rehab a home, I should get $8,000 for the $10-15K I put into the home above and beyond the money that was spent on purchasing the home. I keep areas maintained that most people would not step into, so one day they will be a better place for everyone. I understand that there are differences between home owners and investors. At the same time, I know encouraging both groups to buy at reasonable prices will go a lot farther in producing a solid real estate market. Additionally, with all of the new requirements for seasoning, and buyer qualifications it is still challenging to find buyers for our rehabbed properties.
As you can see from the 10 items listed above, I am conflicted. As a former mortgage consultant I am rooting for my former clients, co-workers, and real estate partners to benefit from this program. It has helped millions of people to achieve their dreams. At the same time, I am not sure when I look at this law, I am not sure that the long term costs are worth the short term benefits.