Housing, tax credits, and realtors

So, the home buyers tax credit is in the news again and it's becoming quite controversial...

Proponents would like to see the program extended well into next year and have the credit expanded to $15,000 (or more), removing the first-time home buyer requirement which, by the way, really didn't restrict this to new home buyers at all, just those who hadn't owned a home in the last three years.

The most cogent argument against the government providing expanded subsidies for its citizens to buy property in a sinking real estate market is that the cost per incremental home sale would jump to, by some estimates, almost $300,000.

You see, most people who took advantage of the first tax credit would have purchased a home anyway, so the government expense per "incremental sale" tends to soar.

However, since the total cost of the current program and the proposed new one would only be in the tens of billions of dollars, rather than the hundreds of billions or trillions of dollars that Congress has become accustomed to while dealing with banking bailouts and federal budget deficit, it's hard to imagine that anything other than a huge public outcry will prevent the program from surviving well into 2010.

In an effort to offset some of the negative press about the program - its relatively low "bang for the buck" and allegations of fraud in the hundreds of millions of dollars that include claims being filed for those who don't qualify, most notably by a four-year old - the National Association of Realtors and the National Association of Home Builders have joined forces, taking out a full-page ad in yesterday's Wall Street Journal claiming that extending and expanding the wildly popular program would do the following:

• Create 350,000 new jobs
• Inject more than $28 billion into the US economy
• Generate $12 billion in additional tax revenue

It's hard to argue with how nice it would be to create that many jobs and provide such benefits to both the US economy and government, however, it also would have been nice to have some sort of note in an advertisement (one that likely cost upwards of $250,000) as to how those figures were determined.

A simple asterisk with a reference to a white paper or website would have made the numbers much more convincing, particularly in light of figures being provided by those who oppose an extension.

Then again, why shouldn't we just trust the home builders and realtors?

The arguments for extending the home buyer tax credit program are universally the same. It supports a struggling housing market and, as we've heard many times before, until the housing market recovers, the broader economy will not recover.

Just once it would be nice to hear some policymaker or some real estate industry professional say that, in order for the economy to stabilize, home prices must revert to more normal levels - say, levels that are supported by rents or wages under normal financing terms - rather than the familiar refrain that home prices must simply stop falling.

It really paints the wrong picture about what is going on in the nation's housing market if, by historical measure, homes are still overvalued by a large margin and the government takes extreme steps to support those valuations.
Including freakishly low mortgage rates - under 5 percent for a 30 year fixed-rate loan as of last week - and low or no money down loans from the FHA and USDA (yes, the USDA), the US government has created many of the same conditions that were present when the housing bubble was at its peak.

The only thing they're doing different this time is verifying income.

With many respected analysts calling for home prices to continue to decline through 2010, efforts by the government to prop up the housing market through tax credits may end up backfiring over the long run.

Since housing bottoms are normally extended affairs, usually lasting for years, this one likely to persist even longer commensurate with the size and duration of the boom that preceded the bust, this program has the potential to set the housing market back for many years.

The reason?

Once the tax credits, low interest rates, and low down payments go away, homes that seem quite affordable today could all of a sudden turn out to be quite expensive.

Pushing interest rates back up two or three percentage points, requiring 10 percent down, and not offering the carrot of a $8,000 or $15,000 tax credit will, all of a sudden, transform a house that once looked cheap into something that is prohibitively expensive.

Under normal market conditions, that would make prices fall even more.

Toss in the realization by hundreds of thousands of 2009-2010 home buyers that took advantage of this government largess only to watch the value of their homes continue to decline - duped by the government it would appear - and homeownership might be set back for another decade.

Like most other aspects of the financial market rescue that has been going on for the last year or so, this appears to be another case of throwing money at a problem and asking the hard questions later (or not asking them at all).

How long can we continue to operate like this?

We'll find out soon enough...

As for our personal housing situation, we've been renting for the last five years and see no reason to stop doing so now.

Thankfully, not only do we still have quite a ways to go on our latest one-year lease, but we're far from decided on where we want to call home for the rest of our lives and both of these factors are helping to make any near-term house purchase decision quite an easy one.

Next year is another matter - with or without the help of Uncle Sam's help.

While visiting an open house yesterday, the anxious sales agent made sure (in an annoying sort of way) that we knew the home buyer tax credit will soon expire.

[Note to realtors: We are likely the exception to the rule, but, attempting to instill a sense of urgency will forever preclude our doing business with you.]

Sometimes I feel sorry for these people.

As was typical yesterday, a sales agent got the best of all possible answers from the standard queries - we sold our California home years ago and we now rent in the area, looking to buy - and must have felt flush with desire for a quick sale, spurring memories of a bygone era.

We probably should've told her that we definitely won't be buying anything for at least another nine or 10 months, perhaps much longer, and it may not be here.

But we didn't. We just said thank you.