Why Congress Must Extend the Home Buyer's Tax Credit!
Friday, October 16, 2009 | Ethan RobertsRating:
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Tycoon readers, as is now customary on the third Friday of each month, I am going to provide you with an update of the national real estate market.
The current state of the national real estate market is one that is at a crossroads.
Which Way is the Real Estate Market Going?
On the one hand, we have seen a continuing decline in real estate values throughout much of the United States in recent months.
While some cities such as Denver, Boston, Dallas, Cleveland, Minneapolis and even Tampa are showing signs of turning around, others such as Las Vegas, Detroit and Seattle are still struggling.
On the other hand, we have seen a recent increase in the number of closed sales, which is probably the most important indicator of the real estate market. That's because increases in closed sales reduce the large inventory levels of unsold homes and put demand upon prices to stop their decline.
Unfortunately, but rather predictably, close to 50% of the sales in many areas are either foreclosures or short sales. It is predictable because these homes have been the greatest bargains to be found in the last decade.
The sale of these homes is also healthy for the real estate market as a whole, because the large numbers of foreclosures and short sales that flooded the market have destabilized home values and neighborhoods across America.
But, Not So Fast
While the distressed-home sales are decreasing market inventory and helping neighborhoods to be rid of empty houses that can attract crime, the sales of those distress properties are, ironically, undermining the values of the homes where people still live.
The unwillingness of banks to distinguish between blighted homes and pristine homes in appraisal values has led to a steep correction in home values from coast to coast.
Foreclosure home prior to clean-out...
The drop in values is so substantial that, as I wrote in my real estate update last month, as many as 50% of mortgage-holders may be upside-down on their loans by next year!
Any Chance for 'Extra' Credit?
As of Nov. 30, the current $8,000 tax credit will come to an end for homebuyers who have not owned a principal residence within the last three years. Up until recently, very little had been written as to whether or not Congress is going to extend or broaden that program to include other home purchasers.
However, last week, House speaker Nancy Pelosi (D-Calif.) addressed the program at a press conference, saying, "Yes, there is under consideration whether we extend the first-time homeowners' (sic) credit. The question is, would that be just first-time homeowners or would you open it up to other purchasers of homes?"
I will forgive Nancy Pelosi for calling the current program by the wrong name. The correct name is the First-Time Home BUYER Tax Credit, and the IRS defines "first time" as one who has not owned a principal residence within the last three years prior to their purchase.
So, to say "first-time homebuyer" is really a misnomer.
If You Participate, Be Sure to Get Your Dates Straight!
There is plenty of confusion about the program as well, as you can see from the photo below. Even the folks in the real estate industry can't get the facts straight!
The sign below, from one of the largest real estate companies in Florida, incorrectly states: "8K Tax Credit? Find a Home Before Nov. 30."
In fact, the correct language, in order to receive a tax credit of up to 8,000, should be: "Close on a home before Dec. 1."
If you 'find' a home on Nov. 29, you have only one day to close!
One bill that just passed in the House is an extension of the $8,000 first-time homebuyers' tax credit for military families. The bill was passed 416-to-0! The bill gives those who are serving overseas in 2009, and unable to look for a home, an additional year to take advantage of the credit.
The Other Side of the Argument
Now, I have heard much criticism previously from Tycoon readers about why this program should NOT be extended. Some say it was real estate -- including realtors, mortgage officers, builders and/or banks -- that got us into this economic mess, so why should we continue to bail the industry out?
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Click here to share your thoughts and questions!)
Some say we should just allow the market to freefall until it reaches a level where the supply-and-demand laws dictate that new buyers will emerge. Others have said they are tired of seeing everyone except themselves get bailed out with one stimulus program or another.
All three of these arguments have validity, and I am well-aware of the anger that still festers inside American taxpayers over the housing bubble and subprime-mortgage fiasco.
Several of our readers have previously given the thumbs-down to the first-time buyer's tax credit.
What, him too?
However, as we approach 2010, the problem is no longer the bubble bursting, nor the subprime mortgages. Most of the new foreclosures that are now hitting the market are "prime loans," which means your normal 30-year, fixed-rate conventional loans.
And the No. 1 reason for all of these foreclosures is our rising unemployment rate.
So, even if we all agree that the housing bubble and subprime meltdown largely contributed to the current economy and job losses, it's time to stop dwelling on the past because, at this point, we really need to figure out what we are going to do to improve the future.
A Simple Request
To that end, I am calling on Nancy Pelosi (yes, I'm sure she reads my articles faithfully) and the rest of Congress to extend the First-Time Buyer Tax Credit for another 12 months.
And I am further asking that the program be broadened to allow investors and second-home purchasers to participate as well.
Nancy Pelosi enjoys one of Ethan's recent Tycoon Report articles...
The recent proposal by Sen. Johnny Isakson (D-Ga.) to increase the tax credit to $15,000 is seen by some as excessive, and it probably has little chance of passing.
However his idea to extend the credit to investors and second-home buyers makes a lot of sense for the following reasons:
1) It will stimulate an increase in foreclosure and short-sale purchases to reduce the choked inventory of these homes that is wrecking home values everywhere.
2) It will enable investors, who are currently having to put down as much as 25% in down-payment money, to recoup some of their out-of-pocket funds. This could stimulate further purchases on their part.
3) It will stimulate tourism and the economies in areas where people historically buy second homes.
4) It will increase revenue to the states, at a time when states are straining to hold their budgets together. Every real estate closing puts thousands of dollars into the state coffers.
A Tax Credit That Creates Work ... in a Good Way!
So far this year, there have been over 360,000 homebuyers who took advantage of the tax credit. Adding second homes and investor purchases to the mix could double or triple that number next year.
If our most devastating economic problem right now is the 9.8% unemployment rate, what better way to reduce that number -- or, at least, keep it from rising any further -- than to stimulate housing?
Each and every real estate closing provides jobs and income to most or all of the following:
Home inspectors, termite inspectors, surveyors, appraisers, closing attorneys or title companies and their staff, mortgage loan officers and their staff, realtors, title-search companies, and handymen.
Home inspectors, termite inspectors, surveyors, appraisers, closing attorneys or title companies and their staff, mortgage loan officers and their staff, realtors, title-search companies, and handymen.
In addition, when homes are purchased, money flows into retail outlets like Home Depot (Symbol: HD), Lowe's (Symbol: LOW) and stores that provide furniture and accessories for their newly purchased home. This keeps people employed, or may even lead to re-hiring in those establishments.
On new-construction homes, all of these same occupations benefit. Additionally, income flows to builders, their staffs, and all of the construction crews who provide the roofing, plumbing, carpentry, painting, flooring, etc. to build a new home.
Many of these construction workers have spent the last two to three years in various stages of unemployment or under-employment.
Construction crew works on a new home...
While people get angry at the real estate industry for the current economic conditions, they need to remember that -- from post-9/11 America to 2006 -- it was the real estate industry that created the large numbers of jobs that helped to grow the economy.
Are There Additional 'Other Shoes' Left to Drop?
There are many economists who are now even suggesting that real estate could have a second leg down.
Increasing numbers of foreclosures still in the pipelines, and upside-down sellers turning the keys back over to the bank, could be a one-two punch that would perpetuate the slide in home values.
A Catch-22 is created as higher numbers of foreclosures serve to lower existing home values, which then forces more people into foreclosure when they can't sell.
With continued weakness in the economy, mortgage rates have settled nicely into the upper-4% range for both the 15- and 30-year fixed-rate mortgages.
Overnight Averages
| Product | Rate | Last week | ||
| 30 yr fixed | 4.99% | 5.11% | ||
| 15 yr fixed | 4.64% | 4.59% | ||
| 5/1 ARM | 4.03% | 4.24% | ||
courtesy of bankrate.com
Yet, despite historically low interest rates and the $8,000 tax credit, the housing market continues to languish. One reason is that almost 33% of prospective buyers are not getting full loan approval, despite being pre-qualified for a loan.
Remember that when you see the headlines and Wall Street jumping up on news of increases in pending sales.
Are You There, Congress? It's Me, Ethan
So come on, Congress. Give the industry the boost it needs, and simultaneously give America a real jobs stimulus that will lead us back into a sustainable recovery.
Extend the $8,000 tax credit for another year, and broaden it to include all real estate purchasers!
So, what do Tycoon readers think? Would you like to see this program extended and, if so, would you take advantage of it?
And if you are opposed to it, what is YOUR solution for bringing the unemployment rate back down?
Let me hear it; I'm all ears!
Ethan, in his younger days...
See you next week!
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Ethan Roberts
Contributing Editor
The Tycoon Report
