First Time Home Buyer Tax Credit Evident in Real Estate Economy
First time home buyers are out in force. Once recent study concluded that 20% of all home shoppers were motivated by the credit, adding a significant number of people to a near deserted real estate market. But all may not be well, the home buyer tax credit has long withstanding implications on the future of the US economy.
Surely, in a market that can’t seem to find a bottom it is a positive sign to see buyers out shopping. Especially younger buyers, who can benefit from both the tax credit and the inherent economic benefit of owning a home.
But we also must consider other elements. The tax credit, signed into law in February as part of the stimulus package will end on December 31, at which point the benefit of buying a home may be lost. Certainly $8000 is plenty of incentive to get people shopping, which very often leads to buying.
Consider though, the people that are buying in on this round of the housing boom. Most are younger, unestablished in their careers, and may not have the best credit or employment history. But one thing is for sure, should they buy a home for less than $80,000, they’re effectively using a 10% coupon for the house.
A great deal, especially considering the tax credit can be applied as a down payment. Eeek! People with practically no money are now able to afford a down payment, 3% for FHA loans, due only in part to a home buyer’s tax credit. If that sounds like the last housing boom to you, you’re not alone!
You see, after applying the tax credit as a down payment, any borrower looks eligible. Truly, if you have a job, decent credit and want to own a home you can. But this also has serious moral hazard complications. First of all, most banks never make a dime from collecting payments on debt. Rather they sell the debt to institutions. This plays out in two ways:
1.Bankers make a lot of loans, knowing they’ll be practically immune from risk after selling the debt. Any borrower gets a loan, period.
2.Home mortgage debt competes with other investment grade paper, corporate bonds, treasury bonds, short term debt, etc. Interest rates are driven higher for any borrower. Further compounding the ARM defaults we’re seeing today.
Also, we have to consider the timeliness of this tax credit. After December 31, we’re likely to see a significant fall out in purchases of homes under 100,000. First of all, homes in many areas will have appreciated by then, lending less benefit to buying. Also, the disappearance of the $8000 tax credit takes a lot of younger, first time homebuyers out of the market.
What we could see is a historic, double dip in home prices which could ultimately send the United States back into 2008. Another wipeout of wealth and more and more people filing for bankruptcy.
I agree this credit is just placing people in the same position that got us into this crisis. If this credit is the reason you can now buy a home then you can not afford it. Many things go into home ownership and the buying price is only the beginning. The gov’t likes to distract us from what is really going on and make people feel good for the time being. It is all about “the now” for the gov’t and of course election years. For years the US has way overspent and loans are too easy an alternative. The gov’t should be doing more to educate people on finances budgeting. This would do a lot more in the long run for the country.