Time to Pick a Lane: More Home Buyer Tax Credits or Not?
One-hundred-and-five. Count ‘em. That’s how many non-weekend, non-holiday days there are left between now and the expiration of the Federal first-time home buyer tax credit of up to $8,000 when the clock strikes midnight the morning of December 1, 2009.
Home builders who live or die in the entry-level and/or first-time buyer market–which includes most home builders capable of selling homes in today’s hostile marketplace–are counting the days. Tuesday morning, it’ll be 104 days, which is that much closer to some pretty hard deadlines for home builders.
In that time, how many new homes can be sold, built, and settled at the closing table? Let’s put it this way, if a house doesn’t begin going vertical in the next 10 to 15 days, the likelihood that it will get any kind of lift from the vaunted $787 billion stimulus bill’s home buyer credit is slim at best.
Midnight Last Thursday, July 2, was the cutoff for California’s tax credit for new-home buyers, per the Los Angelese Times.
The program offered $100 million in credits to about 10,000 consumers who buy homes that have never been occupied. The credit is equal to 5% of the purchase price or $10,000, whichever is less. Buyers must occupy the homes for at least two years immediately after the purchase. The tax board expects to have received 12,000 applications.
Only 20/20 hindsight will allow proponents, detractors, economists, elected officials, and regular old voters to look at the tale of the tape of the home buyer tax credit programs–both Federal and state–and tell whether they worked, and if they worked, what they did to “stimulate” the broader economies they were intended to succor.
Even with abundant evidence, you can just imagine the arguments that will occur as a no-doubt painful economic plotline continues to work through at least the first part of the next decade.
Part of why it’s so hard to get a grip on the effect of the Federal program is the fragmented nature of residential real itself. But anecdotally, builders everywhere report that prices, interest rates, and this $8,000 credit add up to why they’re on pace to start about 100,000 single-family homes in the next 90 days.
Take any one of those fairly significant tail winds out of the equation, and the lives and livelihoods of the people and employers in the home building sector get that much harder. Witness the effect of the upward flutter of interest rates in early June. In simplistic terms, for most of the kinds of people willing and able to parry into today’s home buying market, a $67 difference in monthly payments can make the deal either a go or a no go, depending on whether it’s $67 more or less.
Home building companies are a nexus industry sector. Their forces of supply and demand are intertwined. Greater capacity most often spurs greater need. Lesser action in the sector causes demand destruction. This is why we have diffculty plotting normalized demand for new homes.
This is why, if one’s hand is on the spigot of Stimulus policy, it’s difficult to weigh the positives and negatives of home buyer incentives, particularly as they relate to new-home purchase allurements.
One veteran of housing cycles since 1974 describes the present dilemma like this:
In other real estate down cycles, it was always just one thing wrong. You had interest rates soaring up to 17%, or you had to hit the breaks on inflation, or job growth stagnated, or you had the savings and loan debacle…
Now, it’s multiple things that are wrong. You focus on one of them and the other five grow worse. It’s much more complex.
Everything they’ve [the government] done so far has just pushed the problems farther down the road. You begin to think they should have done nothing to start with, and yes, we would have gone through a lot more pain a lot sooner, but then we wouldn’t have created more, new, even greater complexities than we started with.
We don’t think this is an uncommon point of view, at least in a home building sector famed for its free-enterprise, economically conservative community of businessmen and women. Still, we believe it would be an unnecessary shame were home builders in droves to begin to behave just like home buyers who’ve decided it’s not worth paying back what they owe on a house they bought because its value has put them underwater on their home loan.
So, since the clock has moved that much closer to 104 days left between now and the expiration of the Federal stimulus first-time home buyer tax credit, a couple of big issues suggest themselves.
- In February, when the reconciliation bill for economic stimulus came to vote, Congress voted based on two key motives. 1) An ideological aversion to eight years of policy that preceeded that moment; 2) a reliance on a collective denouncement of Wall Street and big business at the local constituent level. Now, Congress will have to vote based on what puts food on the table and what gets families a pay stub, so lawmakers are not going to be able to blame predecessors or corporations for any lack of courage or conviction in their votes.
- What form will S. 1230, (R-Georgia) Senator Johnny Isakson’s resolution make it out of the Senate Finance committee, where 14 Senators have signed on to co-sponsor? The new resolution calls for extension of the time period for a home buyer tax credit to one year from being signed into law; an expansion of the actual amount credited to $15,000 (up from the current $8,000); and an inclusion of all home buyers of primary residences (not just first-time home buyers).
Just 120 days into President Obama’s economic stimulus program, we’re already seeing debate heat up around the notion of a second stimulus.
- On ABC’s “This Week,” George Stephanopoulos grilled Vice President Joe Biden on whether mediocre signs of recovery and more dramatic job losses meant another stimulus plan might be in order.
- The New York Times’s Nobel Prize-winning, Princeton University economist Paul Krugman retorts in his blog:
- The Wall Street Journal weighs in with its own story on calls for a new stimulus:
Never mind the hoocoodanodes and ayatollahyaseaux. What’s important now is that we don’t compound the understimulus mistake by adopting what Biden seems to be proposing — namely, a wait and see approach. Fiscal stimulus takes time. If we wait to see whether round one did the trick, round two won’t have much chance of doing a lot of good before late 2010 or beyond.
“A second stimulus should be the one they should have done the first time, something that is relatively fast and thoughtful,” said Phillip Swagel, a professor at Georgetown University’s McDonough School of Business. Mr. Swagel, a former Treasury assistant secretary for economic policy under President George W. Bush, said a more-effective package could include more assistance to struggling state and local governments and personal tax cuts.
So far, though, politicians of both parties are showing little eagerness to tackle another stimulus bill. Republicans have attacked the current stimulus package as wasteful and ineffective, labeling it as government bloat at a time of record deficits. As the GOP seeks to reclaim the mantle of fiscal discipline, many are loath to support another round of government spending.
Naturally, the truth is someone will have to spend the money, namely taxpayers. The total cost of home building no longer serving as a tremendous employment and economic multiplier effect needs to be weighed against hesitancy to put more government oomph behind home buyer tax credits that are proving to be effective catalysts in an otherwise grim economic landscape.
Just as the passenger-side rearview mirror says, “Objects in this mirror are closer than they appear.” Deadlines are approaching fast.
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We are planning to buy a new house in California how we know if we can get the CA tax credit? Is still available?
Would like a valid response.
Thanks,
Irma
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