As unemployment rises and foreclosures increase, the National Association of Realtors continues to lobby for an extension of the $8,000 homebuyer credit. Actually, the NAR is pushing for the amount to be increased to $15,000 and/or the credit to be extended to all homebuyers, not just first-timers.
All I can say is, “Give it a rest!”
I understand the logic being used to sell this credit:
- Benefits to the seller – they sell their house for $8,000 more than they otherwise could have.
- Benefits to buyer - the tax credit is like free money to pay their first couple years’ property taxes with. Maybe the buyer sees it as depreciation protection from their purchase price.
- NAR can keep realtors employed selling overpriced assets… Remember, “It’s a great time to buy!” (NAR rep in 2006, 2007, 2008, 2009, etc….).
But what about the negatives?
- All the tax credit has done is push prices $8,000 higher. An extension of the credit and an increase to $15,000 would do the same.
- It was estimated that the extension through 2010 at $8,000 would cost over $116 Billion. I know, what’s another $100 Billion when you owe a $1 Trillion?
- Just like “Cash for Clunkers,” there are always additional costs and opportunities for fraud with government run programs. A recent WSJ article suggested that the true cost to taxpayers for each homebuyer credit was closer to $34,000.
Here’s a proposal for a better alternative: Homebuyers should work with their banks to offer a price guarantee. 5% or 10% of the sales price would put into an escrow account for one year, at which time the average home values for the neighborhood are reassessed. If there has been a drop, a portion of the guarantee money is refunded to the buyer. If not, the amount is given to the seller.
The benefit to the seller are twofold - They sell their home because buyers are not as worried about prices dropping in the area. Also, since the price guarantee is limited to 5% or 10% of the sales price, their loss is limited.
The benefit to the buyer is twofold – If there is no drop in the average home values for their neighborhood, they feel comfortable with the price they paid. If there is a price drop, they have an “insurance contract” which will reimburse them up to a limit.
The benefit to the banks are twofold – Increase in profits via increased number of home sales (closing costs) as confidence rises, and profits from an “escrow fee” on the money set aside.
It’s not a perfect idea, but one that the private market could work out with a little thought.
Last 3 posts by Eric B.
- Snooping on Another Conversation - January 21st, 2010
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- Ruminations - December 17th, 2009
I wish the $8,000 would have covered a couple of years of property taxes… Sadly, it doesn’t even cover the cost of one year’s worth in Texas.
There has to be some kind of unintended consequence with this plan. I need to think about it longer.
Unrelated note, I think we should start requiring people to write in what their captcha phrase is when they post a comment. They’re really amusing: “loosest Employment”
All I have to say is…
http://www.amazon.com/exec/obidos/tg/detail/-/0385514344/ref=ord_cart_shr?_encoding=UTF8&m=A2CUWL313X6OQM&v=glance
Actually, I have one more thing to say. Homeprices, at least in San Diego, are up more than $8,000. Of course that could be a lot of different things, but I think the homebuyer is paying more than they are receiving from this credit. The bigger government intervention is the one where the Fed is buying $1.3 trillion on mortgage backed securities which is driving rates to 4.875%. Now that is a lot of savings.
Fernando - Agreed. Plus, I have a strong suspicion that my wife would funnel it into a furniture account first.
Eric S - I don’t see this as a long-term solution since in a stable market (or slow growth), there is no need. But in a paralyzed market such as this, it seems a good way to restore buyer confidence. Bottom line, at some point someone has to take the loss on a devaluing property. I assume that one unintended consequence would be the increased cost of mortgages as banks pile on service fees for the escrow accounts. But this is really very similar to buying a security AND a put option. If the price goes up, you are out the cost of the put. But if it goes down, you don’t suffer all the loss.
Jason - Was the link to point out that the book was originally $19.95 and is now selling for $0.97? Do you think there is any risk that 30-year fixed 5% loans could become the next frozen asset when rates go up and potential buyers can’t afford monthly payments at the current home prices?