First-time-buyer tax credit is 'unfair'
House Keys
By Marcie Geffner, Tuesday, August 18, 2009.
If you're a homebuyer or seller or you earn your living directly or indirectly from home sales, you're probably a fan of the federal government's First-Time Home Buyer Tax Credit, which is intended to boost homebuying demand. But if you're not a buyer, seller or realty professional, but rather just an ordinary homeowner, for you, this tax credit is a dud.
To recap some of the rules, the credit is equal to 10 percent of the purchase price of the home up to $8,000. The homebuyer must not have owned a home during the prior three years. The credit is refundable, which means the government gives the balance to buyers who meet the qualifications, even if their federal income tax liability is less.
The problems with the tax credit are many:
The credit redistributes income from some homeowner-taxpayers to other homebuyers without regard to any public policy objective other than a desire to pump up the homebuying sector of the economy. The credit isn't even needs-based, except to the extent that so-called "high-income" earners are excluded.
Some 532,527 taxpayer-households had claimed and were eligible to collect the credit as of March 6, according to an interim report by the Treasury Inspector General for Tax Administration. The report estimated that if that trend continued, approximately 1.3 million taxpayer-households would claim and be eligible to collect the tax credit for the 2008 tax year. (The credit can be claimed on either the 2008 or 2009 tax return.)
A little math is necessary to extrapolate the cost of the credit, but suffice to say that the average works out to about $6,800 per homebuyer and the total for the year tops $8.8 billion. That may seem like a paltry sum on the scale of the federal budget, but in round numbers it's still a lot of money, and it doesn't include the additional costs for the IRS to develop yet another tax form, audit the claims and try to recoup credits that were taken, but deemed ineligible.
The credit artificially inflates home values. Economists may argue over the mechanics, but it's simply common sense that a $6,800 handout from the government enables eligible homebuyers to pay more for a home since the extra money comes out of someone else's pocket. Sure, we homeowners would be happier if our homes were worth more, but not if those higher values are but a temporary phenomenon due to a government subsidy, rather than a real increase in property values. ...CONTINUED
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Submitted by William Metzker on August 18, 2009 - 1:16pm.
Marcie Geffner,
Very well said, and I wish more in and out of the real estate business would articulate this sentiment. The real estate meltdown occurred to no small degree because buyers had no skin in the game, and this tax credit carries on the grand tradition of no pain, lots of gain.
Because you write better than I, why don't you take the next step and tell how the IRS unfairly rewards homeowners with the deductibility of mortgage interest at the expense of the public debt? Yeah, we'll hear cries of how eliminating this deduction will kill home ownership, not even mentioning the fact that eliminating deductibility of credit card interest in the 1980's didn't exactly kill off credit cards.
And when that one's done, help sound off on calling home buying an investment. Rrr!
So much further to go, and thanks for taking this small step.
Submitted by Andy Dilts on August 18, 2009 - 1:19pm.
Zoomer
1st time homebuyer tax credit promotes
artificial inflation of houses prices?? I think you might be about 3 years late on that statement Marcie.
Not sure if you checked your sources latley, but house prices are tanking. No tax credit will change that. Until the housing inventory is reduced down to 2 or 3 months, we probably wont see much appreciation(inflation). I have seen consierably more activity because of the tax credit. Yes we will all pay for it in the end.... and so will our kid's kids, but I have yet to see anyone raise the sales price because of a tax credit. Homeowners already receive favorable tax treatment because of the mortgage interest deduction, so this is really nothing new.
Now.... cash for clunkers is a wasted tax credit. All those used cars that could have been donated to charities....
Submitted by Alexis Eldorrado on August 18, 2009 - 1:38pm.
Marcie Geffner makes some good points. As a broker in the Chicago real estate market, I can say that the credit has increased market activity and the number of sales being written. My suspicion is that the closing tables are going to be booked solid on November 28th. Unless there is an extension of the $8,000 tax credit, however, it is just a temporary fix.
The point Marcie brings up about the increased price actually may or may not be true at least in the Chicago real estate market. We are not seeing prices jump up artificially because of the $8,000 tax credit.
However this was absolutely on point in relationship to the low interest rate after the feds jumped in to save the housing market post September 11, 2001. When everyone saw the lower interest could buy more houses, the housing appreciation became like a run away train. And then, of course, anyone with a pulse, at least in the Chicago real estate market could buy a condo, house, or even a 2 to 4 unit owner-occupied building.
Some of these ideas are radical, and only time will tell if it signals a true recovery or a band aid. In the meantime, we keep moving forward from day-to-day in an industry that is in constant change. Good ethics and hard work survive any market trend, however, at least in the real estate arena. There are always people who have to buy or sell.
Alexis Eldorrado
Managing Broker
Eldorrado Chicago Real Estate LLC
150 N. Michigan Avenue, Suite 2800
Chicago, IL 60601
773-588-7777
Alexis@Eldorrado.com
www.Eldorrado.com
Submitted by Kathy Judy on August 18, 2009 - 1:42pm.
I strongly agree with Andy's comment. I have not seen ANY upward effect on prices from the first time buyers credit. I am on the front lines so to speak and work a lot with first time buyers and at the lower end of the market. Prices are in fact lower because of all the distressed property on the market. Quick research with some realtor acquaintances would verify this for the columnist.
Submitted by Matt Drouin on August 18, 2009 - 1:53pm.
I think all of you guys have the intention of this tax credit all wrong. First time home buyers (or however the IRS decides to classify them) are the foundation building blocks for the entire system of real estate exchange. You cannot deny that there are a lot more first time home buyers out there shopping directly because of this credit. What happens when those buyers make a purchase?
The seller of that home, in most cases, makes a move up to a more expensive home. The tax credit has resulted in a substantial to our mid range home transaction activity. These sellers are buyers too. The sellers of the home they buy are buyers as well. We cannot get real estate pipelines moving unless we have NEW buyers.
Furthermore, did you know that when someone buys a home, approximately 20% of that homes purchase price gets spent that first year? This is not only about real estate prices but getting the consumer back in spending mode. Listen, I am a Republican and do not support government subsidies, but I do recognize when a program works as it is intended.
Hell, tax reductions on individuals and corporations would have been far more effective, but who am I to say!
Matt Drouin
Associate Broker
Nothnagle Realtors
http://www.nyhomesgetsold.com
Submitted by Erik Russell on August 18, 2009 - 2:03pm.
Marcie, I can't disagree more! In Northern NJ this tax credit is great for first time condo or small home buyers. This tax credit is not increasing the prices in Northern NJ!
Erik Russell
Coldwell Banker
Cresskill, NJ
Submitted by James Nathan on August 18, 2009 - 2:13pm.
I think Marcie is way off the mark here because she is looking at the situation as if the purpose of the tax credit was simply to benefit the housing industry. In fact, the credit is designed to keep the taxpayers from having to prop up the banks and federally insured mortgages to the tune of hundreds of billions of dollars. If we don't stablize housing, the entire economy could still teeter over the edge, and we are far from out of the woods in regard. That being said, an $8,000 break on the price of a home $200,000 home is just 4% and not that big a deal. In reality, the credit is more a psychological incentive than a major financial issue.
Another key consideration Marcie misses is that many of the homes now selling with help from the tax credit are foreclosures that might otherwise stand empty, deteriorate and drag down property values in the surrounding communities -- meaning all of us taxpayers. If two houses on my block sit empty for a year or two, you can almost be sure that I'll lose more than $8,000 in property value, and so will all my neighbors.
Marcie also fails to multiply her numbers. At an average value of $6,800, 1.3 million tax credits equate to $8.8 billion, which in the context of a $700 billion bank rescue package and $700+ billion economic stimulous package is practically small change though I must admit that a billion looks like real money to me. So while the tax credit may distort the market a bit, it's a lot like dentistry or auto repair. Pay me now and cut your losses or let things deteriorate and pay even more down the road.
Submitted by Jay Thompson on August 18, 2009 - 2:39pm.
Marcie, you have a gift for "stirring the pot"!
I don't see the tax credit artificially (or otherwise) inflating home values. At least certainly not in the Phoenix market, where the boom was ridiculous and the fall hard.
However I do wish the government would just step out of the way and let market dynamics play out. The market WILL correct, the laws of economics are laws for a reason. The government mucking about trying to influence the market is asking for trouble.
Foreclosures suck. I don't like seeing anyone lose their home. But all these "systems" being put into play trying to "save" people is pretty much putting off the inevitable. There are countless loans out there that never should have been made. Attempting to fix the issue after the fact is pointless. And quite possibly more damaging than than if nothing is done.
Let market dynamics work. They will. Not as swiftly as we'd like, and there will be more carnage before it's all said and done. But letting the government keep plodding along, pumping billions upon billions into bailouts, tax credits, modifications et al. is asking for trouble in the long run.
It was a pleasure to meet you in person in San Francisco Marcie! Where's that new picture with your sporty new hairdo?
Jay Thompson
Broker / Owner
Thompson's Realty
Blog: www.PhoenixRealEstateGuy.com
.
Submitted by Ken Lampton on August 18, 2009 - 2:44pm.
When a butterfly flaps his wings in China it causes bad weather in Dallas, Texas. Right?
That may be logical thinking, but I don't think the effect is big enough to measure, even with the most precise instruments.
The first time homebuyer tax credit is like that butterfly. Even with 1.3 million butterflies flapping their wings frantically (that's how many people Marcie says will take advantage of the tax credit) I don't think any of the bad effects Marcie posits will be measurable compared to the "bad weather" of the worst collapse of the housing market since the Great Depression.
I'd say this program is one of the best uses the government could possibly have made of 8.8 billion dollars. They should be expanding it, not shutting it down.
---------------
Ken Lampton
RE/MAX Realtors
www.m-street-dallas.com
Submitted by Robin Harris on August 18, 2009 - 3:37pm.
Marcie,
When did taxes have anything to do with fairness? I have 4 wonderful children, and by the way, when does my $1000 per child tax credit end?
Submitted by Paul Howard on August 18, 2009 - 3:49pm.
When reporters are looking for an angle it is with the intent to publish a piece that will get read. If it ruffles feathers so much the better. This one was a bit transparent. It might be time for someone to do an expose on reporters.
Paul Howard, Broker
NJHomeBuyer.com Realty
Cherry Hill NJ 08002
Submitted by Maya Thomas on August 18, 2009 - 4:15pm.
This entire article is ludicrous. It must be a joke.
Maya Thomas
REALTOR
http://www.ShowcasePortfolioProperties.com
Submitted by Marcie Geffner on August 18, 2009 - 6:18pm.
Wow. So many interesting comments.
As I said in the first sentence of my column, the tax credit is of course a tremendous benefit for home buyers and people who work in real estate. It's *homeowners* who have to pay for the credit and receive no benefit from it.
We already have rock-bottom interest rates, thanks to easy monetary policy, so why should homeowners also have to throw in their hard-earned tax dollars through this sort of fiscal policy as well? (Of course taxes aren't fair, as Robin Harris so aptly pointed out.)
I'm not convinced by the stronger economy argument because personally, I'd rather have the money in my pocket than have the government give it to my neighbors just because they bought a home. I could spend it on my house as well as they can spend it on theirs and that would stimulate the economy too.
On the subject of whether the tax credit inflates house prices: The fact that prices have fallen doesn't mean that the credit doesn't provide an additional prop for prices since without it they might very well be even lower than they are. An additional $8.8 billion has to have some effect on the market.
For the record, my intention isn't to stir the pot or ruffle any feathers, but rather to express a point of view that hasn't much been heard apart from over the back fence. Home buyers and sellers get a lot of ink; homeowners, not so much. And hey, last week's column was about lawns--not exactly a controversial topic, but again, one of interest, I hope, to homeowners.
Yes, the rumor is true (thanks, Jay!) that I did have my hair cut off. I owe my editors a new photo as soon as I get one taken. : )
Read on!
Marcie Geffner
www.marciegeffner.blogspot.com
Submitted by Eric Rojas on August 19, 2009 - 6:44am.
I agree with Marcie's comment above here in regard to the tax credit's effect on home pricing. It's not that home prices have increased due to the credit, the issue is buyer's are willing to pay more (say $5K-10K or so) to secure the home knowing they will receive the tax credit...in some cases the credit can be applied at closing.
So, when it comes down to walking away or buying, they may pay the extra $5K-10K.
Eric Rojas
Realtor, Rubloff Residential Properties
Chicago, IL
www.ChicagoRealEstateLocal.blogspot.com
Submitted by genilyn biggs on March 15, 2011 - 9:35pm.
The Legislature needs to get serious about balancing the budget by addressing every tax exemption, exclusion and subsidy that is currently serving special-interests over the public interest. Politicians who blindly take "no new taxes" pledges need to be put on the spot and forced to defend every one of these subsidies and loopholes - no matter how small or trivial they seem. If you created a business-related move past year, here's some good news. You might be able to claim it as a tax deduction. Keep your receipts, because shipping, travel, lodging and more may be covered. Unfortunately, meals and sightseeing do not count.
Submitted by Donald Harper on June 9, 2011 - 3:06am.
I'm not convinced by the stronger economy argument because personally, I'd rather have the money in my pocket than have the government give it to my neighbors just because they bought a home. I could spend it on my house as well as they can spend it on theirs and that would stimulate the economy too.
http://free--creditscore.com