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
This artificial inflation of houses prices serves no one other than real estate brokers and perhaps a few lucky house flippers, and it’s especially dangerous for homeowners who unwittingly borrow against their phantom equity only to end up upside-down when the subsidy disappears. Inflated house prices also result in higher property taxes, another unhappy outcome for homeowners.
The credit is a hidden gift to lenders and investors. While the extra cash in the buyer’s offer may help some homeowners achieve a short sale instead of a foreclosure, the credit ultimately benefits lenders and investors in such situations. Taxpayers are out the money while lenders and investors reduce their losses on their own bad loans and investments. In the case of a short sale, taxpayers lose twice because the former homeowners are excused from income tax on the lender’s forgiveness of their debt as well.
The credit is unfair since it’s limited only to buyers who meet the narrow requirements. That’s great for those who qualify, but no boon for the unlucky buyers who have to compete in multiple-offer situations against other buyers who can take that nice subsidy. Would you want to bid against a buyer who had an extra $6,800 to spend just because the government decided to prop up the housing market? What’s more, the credit ends Nov. 30, 2009. Pity the buyer whose deal closes Dec. 1.
The credit doesn’t promote sustainable homeownership. While the extra money may help some people buy a home and afford the costly first year of homeownership, this gift from the government doesn’t take into account whether the buyer has the necessary income and commitment to continue to own that home — some homes purchased through the program could become another foreclosure statistic, harming other homeowners in the vicinity.
The bottom line is that the First-Time Home Buyer Tax Credit doesn’t offer a dime to help the nation’s millions of stable homeowners. Sure, we homeowners already receive other lucrative federal tax perks, none of which we would be eager to sacrifice for the good of the whole.
But that doesn’t mean we’re keen to hand over our hard-earned tax dollars to a select group of people whose timing of their "first" home purchase just happens to be especially fortuitous.
Marcie Geffner is a veteran real estate reporter and former managing editor of Inman News. Her news stories, feature articles and columns about home buying, home selling, homeownership and mortgage financing have been published by a long list of real estate Web sites and newspapers. "House Keys," a weekly column about homeownership, is syndicated in print and on the Web by Inman News. Readers are cordially invited to "friend" the author on Facebook.
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