I let the hoopla over the $15,000 tax credit for home-buyers of all incomes slide last week. There’s way too much sick-making news coming out of Washington right now, and, somehow, Republicans dancing in triumph because they had managed to squeeze out a little theft for the rich — and for the NAR — was more than I wanted to try to digest.
Actually, my pet bette noir last week was the ridiculous idea of a compulsory 4% mortgage rate. What this economy really needs is a mandatory 720 FICO score!
Pinocchio — the NAR — is a vampire, a dead thing that feeds on the living, we all know that. But I was writing about that $15,000 gift from the taxpayers to the NAR this morning, and some ugly question came to me.
For one thing, this is a direct transfer of funds from the Federal budget to the housing industry. Normally I love the idea of starving the government, but the net effect of this tax credit is that we will artificially buttress home prices, delaying but not avoiding the ultimate price decline that we have to go through to achieve a true recovery.
Am I wrong? I read the tax credit as being a net reduction in taxes paid. If you owe $15,000 in taxes, but if you bought a primary residence, you pay no taxes.
I can’t see lenders resisting a bait like that. They will find a way to lend you the dough now, and you pay it off over the next 12 — or 24 or 36 or 360 — months. Your $15,000 can pay for up to 10% of the purchase price of the home, and your net tax liability will be reduced by $15,000 next April. If you have another $15,000 in cash — set aside for taxes, perhaps? — you’ve got an 80/20 loan on a $150,000 home with no PMI.
Let’s go once better: $15,000 down on an FHA loan gets you to a $428,571 purchase price — in excess of the jumbo limits in Phoenix. Have you been craving that $400K house up the block. It could be yours, thanks to the tax-payers.
Will ordinary mortgage bankers and brokers pull these kinds of stunts? Maybe not. But the sleazoid lenders who underwrite new builds will.
So here’s the upshot, from where I stand: A real estate market that is crushed under the burden of systemic over-building is about to get even more over-built.
Am I reading this wrong, or did the pretend-friends of capitalism just rape the free market yet again?
Technorati Tags: real estate, real estate marketing
James Boyer says:
Perhaps I see things from a different perspective since we did not have chronic over building here in Northern New Jersey. What we do have is chronic fear. Fear that home prices will crater, fear that people will continue to lose jobs, fear that they should wait longer and see if prices come down further.
This fear brings in a self fulfilling cycle, and as more people decide they should wait and see how things shake out, it seems that they add to the problems.
In my view something needs to be done to get the people who otherwise would be doing something other then sitting back and being fearful, to do something.
Just the view from a market where we don’t really have much for new home construction.
February 9, 2009 — 12:13 pm
kev501 says:
“House of Cards,” the definitive look at the origins of the economic crisis, premieres on Thurs., Feb 12 at 8pm ET on CNBC. See the inside accounts from key players, tracing the calamity from Main Street to Wall Street to Washington. CNBC even reveals how one savvy investor even profited – by 600% – as the house of cards fell. Watch preview and see web extras at http://houseofcards.cnbc.com.
This is the definitive record of today’s unprecedented economic crisis.
February 9, 2009 — 12:16 pm
Greg Swann says:
> “House of Cards,” the definitive look at the origins of the economic crisis, premieres on Thurs., Feb 12 at 8pm ET on CNBC.
Are you affiliated with the show? Any scheduled rebroadcasts? Brian Brady and I are in Seattle that night, and I doubt we’ll be back to our hotel rooms in time to see it.
February 9, 2009 — 12:36 pm
Grog says:
My FICO score is at least 720 and I can’t get a refinance to save my life. Ya see, Georgia is what’s considered a declining market. So unless you back up to the closing table with $50 thousand or more…there isn’t a lending institution that will touch you.
February 9, 2009 — 12:59 pm
Tom Hall says:
I have really wondered why the idea of providing a direct rebate check to taxpayers never gained much traction.
Why can’t I decide where to spend my head earned money? If it’s going to hookers and booze at least make the hangover memorable.
I am not entirely convinced that the credit will make people capable of buying a home – it certaintly may motivate them, but when it comes to qualifying, no dice.
February 9, 2009 — 1:09 pm
Dave says:
Every time that a home-buyer is incentified, the true value of real estate is debased. The blue light real estate specials have got to come to an end.
We shouldn’t be figuring out ways to get American’s to spend money, we should be figuring out ways to help businesses make things and sell those things to other countries.
February 9, 2009 — 1:14 pm
Karen Highland says:
I think Tom has a point, credit is not getting looser, its getting tighter. So this is only going to help those people who qualify, but are sitting on the fence waiting for the bottom. At least this is a real stimulus, not a porked out giveaway to all the folks who were promised goodies if they voted for the one that would bring home the bacon.
February 9, 2009 — 1:17 pm
Bruce Hahn says:
To the extent that the $15,000 tax credit – actually a 10% tax credit capped at $15,000 – brings in first time buyers, it will actually help reduce further declines in property values. That is in the interest of all homeowners, and the economy.
Homes dropped 10% in value on average last year, and many nervous prospective first time buyers are sitting on the sidelines, waiting for the market to bottom out before they make their move. As the inventory of unsold new homes and REOs grows, their understandable fear of buying now is actually contributing to the problem. Another 10% decline in home values will put millions of additional current homeowners under water, and lead to an even bigger rate rate of foreclosures. Give first time buyers a 10% credit, and you’ll have absorbed all their risk if we have another year like the last one.
Most existing home sellers don’t need credit – they need buyers. A first time buyer usually begets two more upstream sales, and this would be a far more productive stimulus than giving the credit to existing homeowners. In effect a credit limited to first time buyers would help sellers of existing homes as well, by providing them directly or indirectly what they really most need – buyers.
There was an income cap on the credit at one point. If you limit the credit to first time buyers you’ll effectively solve that problem for the most part, but an income cap is a good idea anyway for symbolic purposes.
The government could also make a profit while helping many of the other 90% of homeowners who have lost a lot in their investment portfolios and home equity. They won’t be buyers next year but could sure use help rebuilding their savings, and the car dealers, malls, and restaurants would benefit if they resumed their consumer spending.
Having helped first time and existing buyers through the tax credit, the government could help existing homeowners by adopting the opposite of NAR’s 4% proposal. NAR wants government subsidized mortgages only where a real estate commission is involved, but the buyers credit will take care of brokers and agents, while also helping buyers, sellers, and the economy.
The reverse of the NAR approach would be to lend money at a profit to refinance existing mortgages for homeowners with high FICO scores. Add a 1% government profit to whatever the 30 year federal bond rate was at the time, and relend the money as a 30 year fixed rate mortgages to refinance only those homeowners highly unlikely to default.
The government now pays 3% on 30 year bonds. A homeowner with a $200,000 existing 30 year fixed rate 6.5% mortgage would save about $4k a year with a 4% mortgage, and the government would gross about $1,000 a year, which could be used for deficit reduction and for job retraining for former real estate agents.
February 9, 2009 — 1:25 pm
Dave says:
To the extent that the $15,000 tax credit – actually a 10% tax credit capped at $15,000 – brings in first time buyers, it will actually help reduce further declines in property values. That is in the interest of all homeowners, and the economy.
I ask this respectfully, but how will this help reduce further declines? It is well documented that this tax credit will be used mostly by people that currently own homes, therefore it is unlikely to have much effect on inventory levels. Furthermore, forcing a false housing bottom only benefits those that currently own, not those that are yet to own. Just another common misconception about “protecting housing values”.
“Protecting housing values” = propping up housing values; which is bad for everyone in the long run. If you need to be enticed to buy a home, then you shouldn’t buy a home.
Just my opinion.
February 9, 2009 — 1:34 pm
Geno Petro says:
“They will find a way to lend you the dough now, and you pay it off over the next 12 — or 24 or 36 or 360 — months.”
Isn’t ‘amortize’ latin for slow death?
G.
February 9, 2009 — 2:59 pm
Joshua Hanoud says:
The problem isn’t that buyers aren’t buying…it’s that seller’s aren’t selling.
By that I mean seller’s aren’t pricing their homes according to today’s market, and real estate agents are continuing to list overpriced crud which mucks up the works, creates more competition, and continues to force prices downward.
Greg, you are 100% right – this is a series of events that must be gotten THROUGH, not pushed off to the side. You can’t fight the rules of the game and that’s all these stimulous packages are trying to do…find ways around the laws of economics.
Give the guy who can’t afford his mortgage today a free pass for 6 months at the taxpayers expense so he can delay his foreclosure and keep living in the home he couldn’t afford to begin with. All it does is prolong the inevitable.
We need to get through this, get it done and over with, as soon as possible in order for things to start becoming manageable again – and the longer we try to force the laws of economics(nature?) to change, the longer we’ll be spiraling downward.
I think you’ve got to take a really tough stance with this because there is no “easy” solution…
February 9, 2009 — 6:11 pm
Tom Vanderwell says:
Geno – you crack me up! I love it!
A couple of thoughts from a banker:
1. A $15,000 tax credit will not, in my view, help the real estate market. What will it do? It will persuade some people to go buy a new house (if they were on the fence). The first time buyers will generate some new sales, but the current home owners are merely going to shuffle the inventory because they have a house to sell. Frankly, I’d call it a subsidy to the bankers and the real estate profession because they would benefit most.
2. Supporting house values at something other than the real market values merely delays the problems and the adjustments that need to be made.
3. Bruce – you said, “A first time buyer usually begets two more upstream sales, and this would be a far more productive stimulus than giving the credit to existing homeowners.” That’s not true any more. In my area as well as many others, 50 to 80% of sales are short sales or foreclosures, so they are “one off” sales. One and you’re done. That means that the $15K that you give to the first time home buyer does us virtually no good because it helps only one family.
4. We were getting away from 100% financing because it’s too risky. Now we want to do 96.5% financing (FHA) and then give the buyers 10% back? That’s 106.5% financing if my math is correct. So if we’re trying to get responsible about credit, is that really the thing we want to do?
5. When the talk first came out about 4.5% interest rates, I asked a LOT of people and calculated the difference for their particular situation. Every single one of them said that the difference between 4.5% and 5.5% (where rates were when this came out) was not enough for them to want to venture out and buy a new house. I believe the same thing can be said of the $15,000. Will some people take advantage of it? Those who were planning to buy any way, yes. Will enough of them do it to turn the economy around? Not unless they are confident that they will have a job next week, next month and next year. That’s what it comes down to.
I think that’s enough for now. Thanks!
Tom
February 9, 2009 — 6:33 pm
Mike @ Phoenix Foreclosures says:
You should definitely push the mandatory 720 credit score, that would fix a bunch of our core problems a lot quicker than what we’re doing now…
February 9, 2009 — 6:51 pm
Arn Cenedella says:
Nothing is set yet !
House and Senate need to agree on a bill.
This is a transfer from the government (ie all of us) to certain individuals. Not saying it is right but it really is not much different than everything else in the stimulus package.
February 9, 2009 — 11:31 pm
Michael Cook says:
Two comments that should make it to the side bar:
“Why can’t I decide where to spend my head earned money? If it’s going to hookers and booze at least make the hangover memorable.” Undoubtly a better use of the money…
“What this economy really needs is a mandatory 720 FICO score!” If only this was possible…
I personally agree with Tom. I think we are talking a lot about something that will have a very small effect on real estate and ultimately be a very small part of the stimulus package. Yes, its a bad idea, but there are far more egregious things being talked about.
February 10, 2009 — 9:06 am
Sean Purcell says:
Looks like we worried for nothing. The negotiated legislation dropped the Senate’s call for a $15,000 bribe.
February 11, 2009 — 10:50 pm