Should the First Time Homebuyers Tax Credit be Expanded and Extended?
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3D Realty Handshake The $8000 first time homebuyer's tax credit is set to expire on November 30th. This means that those who want to take advantage of this refundable credit have only a couple months left to close on their home purchases. Since it could take 30 to 60 days to close on a home, the deals must be made soon. Now there are talks in Congress and the administration about expanding and extending this tax credit. Here are some arguments both for and against this decision.
Arguments for extending the tax credit
Increased home sales
Real estate industry groups argue that this tax credit is largely responsible for the increase in home sales this year. The National Association of Realtors estimates that this program will result in an extra 350,000 sales. The builders and realtors argue that the expiration of this tax credit will hurt the nascent recovery of the housing market.
Stimulates other parts of the economy
When consumers buy homes, they also buy a lot of other goods and services with it. For example, most people would spend some money on furniture and home improvements after they buy a new home. Those who are arguing for the extension say that the tax credit encourages new homeowners to spend more elsewhere, and that provides jobs.
Arguments against extending the tax credit
Cost of the program
Many first time homebuyers who bought homes this year would have bought homes regardless of the tax credit. This means that the cost to the government to generate each new sale is much more than $8000. If you take the current estimated cost of $15 billion and divide it by the NAR's estimate of 350,000 extra sales then each extra sale cost about $43,000. Additionally, the $15 billion cost is already double of what was budgeted in the original stimulus bill. If this credit were extended it is unknown how much it would cost.
Higher home prices
There have been many anecdotal stories of bidding wars by first time homebuyers who are rushing into closing on their purchases. Some of them are bidding much more than the listing because they feel that the credit discounts the price. This credit could end up being a worse deal for buyers if they had to pay much more than the price they would have had if the credit did not exist.
Diminishing returns
Just like the Cash for Clunkers program, this credit could have pushed up the purchase decisions of a lot of first time homebuyers. This means that there will be less potential buyers in the near future.
No downpayment
As I wrote earlier, this credit can be used as a downpayment in the FHA program. This is essentially a government sponsored 0% down loan. This makes sense for some people, but it could also cause more foreclosures since those who have no equity in their homes are more likely to default on their loans.
Currently, there are several different proposals to extend or expand the credit. One proposal is to just extend the deadline of the current scheme by six months, and another proposal would expand the credit to $15,000 and open it up to all homebuyers until the end of 2010. Needless to say, the real estate industry groups are arguing for the extension of the credit, but personally I think real estate would be cheaper for the consumer without this credit. By looking into the government's past record of extending Cash for Clunkers and other bailouts I am guessing that there is a good chance that they would expand this credit regardless of the costs.
What do you think? Are you looking forward to an extension of this credit? Why or why not?
Tagged: Real Estate and Housing, Taxes
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My husband and I recently (two weeks ago) took a first time homebuyers class required to qualify for a FHA loan. It is not true that you can use the tax credit as a downpayment. That was something that was allowed earlier in the year, but it is no longer true.
The credit pushed my wife and I from "maybe get a house" to "get a house". We were moving anyways, and it was close in our rent vs. buy decision.
So I was soon to be in the market for my first house. I was planning on mid 2010 to collect a 20% down payment. The government made a plan and said hey 8,000 on your taxes if you do it now. After calculating the PMI and risk levels I determined that buying this year would be the smartest. I'm guessing that many are in a similar mindset. Extending the program 6 months may be helpful since it wasn't even on a full year. But the number of homes bought per tax-dollar spent will get worse and worse. We stopped the crisis, the market bottomed out, the awake people that could, bought. Seems like it worked and that now its time to be done. If the tax credit goes up to 15K and is not retro-active I might just go into foreclosure out of spite.
Guest, the program for using the credit towards the 3.5% FHA is by state. In many areas of California it's still valid.
I'm in California, we were specifically told that it was no longer valid. I'm also in the Bay Area if that helps.
It depends on the agencies that give out FHA loans in your area. It is still available in all the following cities in Cali according to this new press release:
http://www.prweb.com/releases/2009/09/prweb2884044.htm
Those cities are all in SoCal, though. Anyway in the Bay Area $8k doesn't go very far.
Some other states also have similar programs so it is not completely gone for everyone.
It makes sense that they would tell us it wasn't valid then, as all of us in the class were looking to buy in the Bay Area. Thanks for helping clear that up!
I have been saving for a 20% down payment for the last few years. I decided to make the leap into the market and made a purchase last month. I would have taken me an additional year to save the 8k I was being given in the tax credit. I felt like I would be walking away from a great opportunity. I now have to pay a monthly PMI fee but I also reached my goal a year or two early. If the credit goes to 15k and is not retro-active I don't know how I will feel about it. I am grateful for the 8k credit but I might feel kinda cheated if someone else gets almost double what I did. Human nature I guess.....
I just read up on the 2008 vs. 2009 credit yesterday.
In 2008 the tax credit was an interest free loan, paid back over 15 years. In 2009, no payback necessary as long as you're in the house and meet other criteria.
From what I can see this year's buyers are getting a sweet deal, but last year's was more sustainable from a federal budget balancing standpoint. It still gave home buyers a boost when they needed it: within a year after buying the home, when you just threw a big chunk of money into it and may want to do some renovation.
The original problem was giving loans to people who couldn't afford it. A tax credit has nothing to do with or fixing stupid lending policies.
I find it ridiculous and hypocritical that Brent and Maxwell would be "pissed" or feel "cheated" if they increased the credit without making it retroactive. They were happy to take the first credit and not think twice, but now that others could "profit" more than them they suddenly feel outraged?!?
This whole thing is a BS scam and an outrage from the get-go. It doesn't matter if it's a tax credit or an interest free loan (like it was originally), it's still a horrible, horrible program.
I have one question for everyone who thinks this benefits anyone...if this credit soooo great then why not make the credit for $50,000? Or better yet, $100,000? Hell, let's just give everyone a home! Of course this is reductio ad absurdum but the point is that someone has to pay for this. And that someone will be the taxpayers.
This stimulus shenanigans has got to end sometime and when it does the game is up. No one knows for sure truly how much demand was brought forward but this Keynesian-clown program but what we do know is that demand will drop as soon as it's over.
Personally, I'm waiting for this to end so I can look at buying afterwards. Why? Because now, suddenly every home is worth $8,000 less. No free money program = no propped-up home prices.
We've got a decade of structurally high unemployment ahead with no growth drivers. The quicker we all realize the reality of the situation and take the pain, the quicker this will all be over with.
Agree. As someone who has made the careful decision to rent versus buy, I find this absurd.
Why not wait till the extend and up a third time it might reach 20K... the whole point being that you should not reward latecomers.
Hi Brent,
So I'm guessing you don't think your kids should have an equal or better life than your because they are "latecomers" then? I would really like to see if you really go into foreclosure out of spite if the credit were extended. When you buy things sometimes there are better deals down the road. There is no point in getting upset that another person got a better deal than you because they were patient and waited. I mean, I bought my Wii for $250, but if another person bought it for $150 I wouldn't smash my Wii. Anyway, all I am saying is that it is great for you if you did take advantage of the credit. Personally I think the only people who should be upset are those who cannot or do not want to use the credit, because the money is collectively coming out of their pockets.
There is this awesome $5 million house in PAcific Heights my friend has been eyeing. He makes over $1million a year and is hoping the tax credit will be extended so he can use the money to do some landscaping at his new house if he buys it!
Bailouts for all!
Financial Samurai
Ignorant ranting.... your "friend" doesn't qualify for the tax credit
No, I'm not talking about years down the line, just the 6-12 month extension. Maybe I'm looking at this from a fairness perspective and also a lesson setting perspective. If a teacher in grade school said, you get extra credit if you turn in this assignment 2 days early. You go and do it early and get your extra credit. But if the extra credit due date comes due and the teacher says for everyone that didn't complete it yet, you get even more extra credit by simply turning it in tomorrow (1 day early). The students learn to not trust the teacher's rewards.
This is supposed to stimulate, but if the stimulus gets greater the longer you hold out, it doesn't exactly provide an incentive to act early does it?
Brent, your example is a false analogy. You're attributing buying a house, a want, to doing homework, a need. Homework is a required; a house is not. So throw the entire ridiculous example right out the window.
No one forced you to buy a house. You saw an opportunity (the credit) and took it. If a better one comes along then so be it.
Saying you'll default because you didn't get the best deal is petty and childish. Be happy that you were even capable of taking advantage of the $8,000 credit. There are plenty of people out there who are pissed at you because you got an $8,000 credit whereas with the first attempt the deal was only an $8,000 interest free loan!!
LOL, these analogies are absurdly unnecessary.
Brent,
Unless you pay your $8,000 back to the government you are being hypocritical. You took advantage of the first "extension". Other people bought the year before and only received $7,500 that must be paid back.
If you want it to be "fair", you should pay yours back as well so that you didn't get a better deal than the folks that came before you. YOU are the latecomer.
if it goes up, those who got 8K will be upset?!! Those who purchased just before and are repaying an 8K loan are also upset. As are some of us who bought our house with none of those special programs. Either buy a house or don't. I'm tired of seeing the "think you can't afford a house, get 8K free!" signs all over the place.
I think it would be nice if the government then proposed a $10,000 tax credit for first time VACATION home buyers. I've always wanted to get a place on the beach in Hawaii, or maybe a mountain place in Nevada, where there are no state income taxes.
If we're all paying more taxes over the next 7-8 years, we might as well try and all reap the rewards right?
Equality for all, rich or poor!
Financial Samurai
My husband and I are currently saving for a down payment to purchase a house. We were glad when we heard about the $8K tax credit, but realistically we knew we probably wouldn't have our down payment saved by the end of November. Our original goal was, and still is, to purchase a house by July 2010.
So, Brent who made this comment: the whole point being that you should not reward latecomers. may not be quite on target with many potential purchasers. I don't think that people who are waiting, or saving money for a down payment, are hoping the government gives them a bigger tax credit. My husband and I are going to purchase a house with a tax credit or without one, that was never a determining factor.
For those people in the right spot, at the right time, who purchased their first house and are going to receive the tax credit, good for them. I'm sure most of them are happy they got in on this program.
I just hope that those first time home buyers didn't use the tax credit towards their down payment, and I'm glad to hear they've stopped that policy in most places. Isn't that why the housing market is in the terrible state that it is?
-Little House
Little House - I agree with your post 100%. The problem is, once you let the cat out of the bag, it's impossible to get him back in!
Now all first time homebuyers who missed the tax credit window will be a little amiss. We need now permanent tax credits for first time homebuyers forever, as to show no favoritism. Once this happens, we'll be sucking more federal budget wind, but this is how things happen.
Financial Samurai
All I can think about is how our kids will be saddled with yet another heavy tax load down the line. Some one has to pay. And it's not just actual money, but the additional costs of administrating a program as well.
I agree with you, Financial Samurai and Olivia, this will cost us (or our children) in the future. And again, I think people who were already planning to purchase a house within the next year are going to do so with or without a tax credit.
One of the previous comments mentioned something about how the tax credit incentive is making the housing market spike up a bit because of bidding wars. So, I guess I'd prefer to not have the tax incentive if that means keeping the list price of the house the actual list price and not $50,000 or $100,000 more due to bidding wars. I see this happening in my neighborhood: a house is listed for $250.000 (a real fixer-upper). Then, once it sells, it sells for $300,000 or more! If this continues, my husband and I will again be in a situation where we can't afford a house.
-Little House
The program is expensive for sure, but where would the market be without it? It's fair to say the $8,000 tax credit has impacted the Real Estate Market by resulting in more home sales. There's no doubt the majority of first time buyers who bought homes in 2009 were better qualified to purchase than many first time buyers between 2001-2007. This is good news because we can expect less foreclosures moving forward.
As far as an extension, how about a tax credit for less? This time not just for first timers, but for everyone. If the ultimate goal is $0 tax credits, lowering the amount would lead the market in that direction without a total market shock.
My husband and I are going to be purchasing a new home soon and of course it is upsetting we do not qualify for the tax credit because we owned a home for a year and sold it July of 2007. This credit could really get us going, because with this new home we plan on purchasing a new bedroom and livingroom set but of course we have to charge it. We don't have $7,000.00 just lying around so this tax credit if extended to all homebuyers could really help us get our furniture and help the economy by putting the money back out there!
Hi Lisa - Why would you be upset if you bought a house and sold it a year later in 2007? Wouldn't selling the house just a year later so soon mean you don't want to buy another house? Sorry, just don't get it, I'm pretty slow :)
Xin, I think you will love the Hildebrandt's post I wrote today. I sent a shout out to you and Wise Bread. Long live America!
What's the effect of this credit on prices? Right now, I still see wacky market conditions (in Los Angeles). Some areas have 10x more listings than sales. Sales uptick or not, there's lots of inventory... and some agents are pricing properties too high, perhaps in anticipation of sales growing as people learn how to get this free money.
Also, I thought this was a credit toward buying a NEW home, not buying a used home. That makes a big policy difference. If it only applies to new houses, then, maybe it's a necessary price support.
If the market can only afford to buy houses at below cost, the developers may go bankrupt.
That, alone, may be reason enough to eliminate this credit!
I am a first-time buyer who has been saving for years for my downpayment. As a single person I finally have saved enough and earn enough to afford a home on my own. But according to this program I make too much to qualify for the entire credit. Maybe I'll marry some loser with no income to take part in the cash give-a-way!
I hope they just put an end to it and don't extend it. Even the 15K credit for any buyer should be taken off the table. Eventually we need to find the bottom of the market. This is just postponing it. Personally I'd rather wait this credit out and then look for a house. That way I can hve a lower payment for the next 30 years instead of 8K upfront (or 1700 in my case) that's fake money anyway and I'll be paying back through my increased taxes over the years.
End it, get it over with and let's find out where the market really is!
I did my research and anyone who is buying a house should do their research. This is why I have not yet bought a home. At the very least, the $8G credit is def going to be extended, at least another 6 months. Worst case, if it expires- home prices will crash because if they're not getting sold with the credit, there's no way it's going to happen without the credit. I don't understand the rush right now. It's in everyone's best interest to wait and save... as long as the unemployment remains high.
Hi Guest #29,
The Tax credit for new homes was California only, and that expired already because they ran out of money. I wrote about that a while ago here:
http://baglady.dreamhosters.com/2009/02/26/10000-tax-credit-for-californ...
I am a Realtor in Texas and the $8K tax credit has definitely helped first time homebuyers. Some got off the fence and decided to buy because of it and others were able to buy only because of the tax credit. Extending it for 1st time homebuyers is a good thing for all. They do spend money on fixing up the homes, furniture, etc and it has removed a lot of homes from the market that would have just sat and done nothing for anyone. Expanding it to include all home purchases would not have as big an impact and would be fiscally irresponsible.
The $8K tax credit can be used as a downpayment in some places. It depends if the state government has put a plan in place to be able to funnel the money through them. My nephew in Missouri bought his home using the $8K as downpayment. In Texas, we can't use it as downpayment.
Why people complaning when its money from the govt. you could have purchase a home and not even get a tax credit, be grateful that its helping people who couldnt get a home....This world full of why i didnt and shouldnt... Just be happy and grateful and stop complaining..
There are a lot of arguments for and against the extension of this tax credit, but I believe that it should at least be extended. I know of many people who would have never bought their homes if this extra benefit hadn't been thrown in. It has helped to sell a lot of home that would otherwise still be sitting on the market. And this also helps out those who are in foreclosure or need to close on a short sale to take a step toward recovery. (yes, I said the R-word) I'm hoping that it gets extended and we can see further benefits of this tax credit.
Ellen,
If your goal is to see affordable housing then the best thing that we can do is eliminate this credit. All it does is serve to prop up home prices. Extending the deadline does not increase demand; rather it only pulls forward demand!
The people who bought a home and received this credit were going to buy a home anyway. This only served to rush them into a decision sooner rather than later. However, what happens when the music stops? The stimulus has to end eventually and when it does housing sales will be depressed.
There is no such thing as a free lunch and this program is no exception. Just like Cash for Clunkers, someone has to pay for this "free money" and that someone will be you and your children.
We are in the process of buying our first home we actually close tomorrow. We just found out that we do not qualify for the tax credit since we are buying the home from my father. We are not getting a discount and are paying what the realater and the bank said it was worth. We are both first time home buyers and frankly the plan stinks!
We are in a recession, and this legislation will only increase our debt.
Less tax revenue = Larger defecit and national debt
Obama and congress complained about GW Bush/Clinton era policies that led to easy credit for unqualified consumers, ridiculous spikes in home prices, and a large amount of foreclosures.
This bill will artifically raise home prices and start the ball rolling towards unsustainably high real estate prices all over again. If the credit is extended indefinitly, people will buy a home, flip it, live in it for 3 years, and then repeat the process all over again. What's to stop a large group of people from pooling money together and taking out multiple mortgages, each under a different name?
This mentality is part of what caused the over-priced housing market that collapsed recently. This gives me flashbacks of watching all those "Flip this House" shows on HGTV.
Thanks for posting this info. I'm enjoying reading all the comments.
For anyone else reading who wants to find some tips to help with using the tax credit to buy your first house, check out this site. http://www.firsthomeexperience.com.
There are sections about home maintenance, housing market info, stuff on the tax credit, and a free booklet with a house buying guide. Plus there are some very easy contests to enter.
I can't believe some people are complaining about tax payers getting a tax break and how much it is going to cost. I guess only large currupt corperations deserve federal tax dollars.
I Just came across to your blog and reading your article this article is very help full to people. people are complaining about tax payers getting a tax break and how much it is going to cost. I guess only large currupt corperations deserve federal tax dollars.
http://betterblog.ning.com/profiles/blogs/making-the-home-buying-process
The $8,000 tax credit looks like it is going to be extended through April 30, 2010, then will be phased out. The bill has passed the Senate (3 hours ago) and the House earlier this week. Obama's staff has stated he will sign it - probably in mid-November.
There is no possibility of a $15,000 tax credit, that was 1 legislator's whackadoodle bill that didn't make it out of committee. But the realtors seized on it and borrowers decided not to buy this year in hopes of a 2010 jackpot.
Regarding FHA and using the $8k as the down payment - FHA rules specify that the borrowers must find a community lender (non profit) willing to lend them $8,000 for their down payment, and then pay it back 6 weeks later when the refund check arrives.
In my state of Washington, the major community lender is the Washington State Housing Finance Commission. They decided not to lend against the $8,000 tax credit refund, because IRS rules prohibit them from receiving the refund directly. This would put them in the risky position of chasing down borrowers to sign over their $8,000 checks. This is why the $8k tax credit is not available as a down payment in most areas.
As a loan officer (who always put people in fixed rates, and tried my best to convince people to stay away from pay option ARMs and short term ARMs)....I encourage first time home buyers to *bank* that money as their emergency fund. Don't fritter it away on home improvements. Buy a home in reasonably good condition and bank the money in case of an emergency or layoff. I can't force them to be financially prudent, though. Some have spent the money.
Just created this petition... Please pass it on.. This isnt fair the way they set it up and it isnt retroactive..
http://www.thepetitionsite.com/1/homebuyer-credit-expanded-and-extended-...
I know it has been extended to April 30th, but would love to see it come back, we are not in a position to buy till August
My husband and I are trying to close on our first home right now and I would personally love the tax credit back. It would really help us pay off a few debts that would free up alittle money for us. Does anyone think that there might be a chance for either a new tax credit or the old one back again.....
anyone who was a first time home buyer in the 2010 calendar year, should qualify for this tax credit. It is totally unfair to only extend to those who were under agreement by May 1. What about the rest of us who did so in June and closed in July??? why should we be left out from this credit! why should we be penalized? rediculous!