Mortgage News

Housing Related Tax Incentives: Are They Really Such a Good Idea?

Sept 29, 2009 - American taxpayers are already carrying a sizeable burden on their shoulders when it comes to the economic crisis in the way of bailing out the banks, along with Fannie Mae and Freddie Mac and funding Fed purchases of mortgage backed securities and treasuries just to name a few.  The U.S. tax code has long been supplied with ample housing related incentives from the deductibility of mortgage interest to the capital gains exemption on the sale of a primary residence.  How many more taxpayer giveaways can really be expected before the government is only serving to artificially re-ignite the very asset bubble that just exploded.   Rather than doing what is politically expedient it is time for the government to step aside and do what is economically necessary and let capitalism sort out its own problems like it is supposed to.  Creating all of these so-called “incentive programs” only disrupts the logical decision making process of the consumer that is supposed to be the cornerstone of capitalism.   

A case in point is the misnamed first time buyer tax credit program.  First, the program is not for first time buyers, it is for Americans who have not owned a primary residence in the past three years.  Does that mean if you were a real estate investor or a speculating property flipper, contributing to the crisis, you are now eligible to use up to $8,000 of taxpayer dollars to buy a house?  How is that fair??  Let's start by applying some basic logic.  We have a weak jobs market coupled with a massive over-supply of available homes for sale.  Does that sound like a make sense buying opportunity for “first time” home buyers?  While it is true that the available inventory of homes has fallen back down to a respectable level of under 8 months (by some calculations) there still remains 18 million vacant homes, therefore an over-supply problem still exists.  Other contributing factors remain, including the “stealth” inventory of homes for sale resulting from the (intentional) delayed release of foreclosed properties by the banks, along with the prospect of even more defaults and potential foreclosures on the horizon when the next round of mortgage rate re-sets hits in the coming quarters.  Does this really make a strong case for buying a home now?

The effectiveness of the tax credit program's impact has also been called into question.  The IRS estimates that almost 1.5 million homes have been sold since the tax credit was initiated however more importantly the National Association of Realtors (NAR) believes that the tax credit was a deal-breaking element in only 350,000 of those sales transactions.  Translated, this means that most of the sales would have happened regardless of the presence of the tax credit so it is an unnecessary taxpayer giveaway for the vast majority of the participants.  The program has been estimated to cost around 15 billion if it is terminated as planned at the end of November and while that alone appears to be a high per transaction cost for the 350,000 legitimate home buyers involved, there is a group of Senators in Washington who want to extend the program and almost double its credit limit from $8,000 to $15,000.  Rather than extending and expanding these home buyer crutches, which only serve to inflame market risk by creating false incentives, we should allow potential home buying consumers to make rational choices without skewed incentives disrupting the normal market correction and recovery process.

Nancy Osborne, Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.

"I am addicted to Bloomberg TV" says Nancy.

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