THE $8,000 QUESTION
Real Estate Market Sunday, March 8, 2009 at 11:25PM 
I was recently in a debate with a colleague whom shall remain nameless (initials D.H. President of C.A.R.) about the $8,000- homebuyer tax credit. He felt the credit should be given at closing. This would spur new sales and help get housing back on track. It would be better for the first time buyer to utilize it for the purchase of their new home. He was so excited about this; that he even posted it on Facebook (a social networking site, be D.H.'s new friend), I digress.
The post had me thinking about the credit at closing and I concluded, this was a bad idea or I disagreed. Why? This is all about stimulating the American Economy. A credit at closing would not do this. It would be a kiss to the banks, which to date have received $400 Billion in asset relief funds. This tax credit would be used to write down a loan or for closing costs. By the way, FHA loans have provisions that allow a seller to assist the buyer, up to 6%. These funds would assist the first time buyer in their purchase and it would also pump more money into the banks. This money belongs everywhere in the American Economy except in banking.
Currently it has been surveyed that first time buyers make up 42% of the buyers out in the marketplace. Let’s say a buyer spends $250,000- on a condo and uses the $8000- tax credit to pay down the financed amount and using an interest rate of 6% they save $46- a month on their mortgage or $552- saving yearly. That’s nice and that’s it.
Let’s take the $8,000 tax credit and the buyer spends $46 a month on anything and everything, local restaurants, hardware stores, movie tickets, a manicure, you get the point. Last year 4.9 million homes were sold in the U.S. and we know that 42% of buyers were first time buyers. With that said, they would pump $92 million dollars a month into the American Economy; which could save jobs, create job security and perhaps create new ones. This added job security and new jobs could create new first time homebuyers. I’d rather see this than an $8k write down or payment of closing costs; or $16 Billion to the banks.
Our industry yes is a bit battered and not as a result of US; as a result of the bad decisions financial institutions have made. We all are paying for it and continue to pay for it; Bank of America and AIG, need I say more.
My nameless colleague (D.H. President of C.A.R.) said I was not only wrong; I was WAY WRONG! We should make the buying process easier for folks to get into a home. I agree there accept it’s the banking guidelines that have to change; not the tax credit.
Additionally, it was easy for folks to buy a home and look at housing now, in fact look at the American Economy.
I’m sure many of you disagree with me and that’s o.k. Perhaps I need more convincing and to hear a different perspective from others who agree with my nameless colleague (D.H. President of C.A.R.) Post your most convincing comments/arguments. I can be swayed.
Let's hear what you all have to say.
BLOG ON!!
Reader Comments (18)
Mabel, I think both of you are right. Yes, the credit at closing will push some first time buyers in the market, specially the ones with not enough down-payment to buy now. However, there are other buyers that don't feel comfortable using all their savings for down-payments, for those people would be great to replenish their savings with the credit after the closing. And yes, there is a group of people that would buy no matter what, credit or no credit. Which way is better for the credit to be given? You will hear probably an equal number of people sustaining each of the opinions.
Regarding the banks, I believe a good chunk of the money will get back to them. How? Through savings, down-payments, credit card pay offs, and so forth.
I beleive strongly that the banking industry has to find a responsible way to make the purchase of a home easier. There are guidlenes (enforce them) that the purchasers has to prove their ability to repay the loan (no stated) with the only flexibility being the interest rate. If the fed is lending to the banks at a rate of .5% (half of 1 percent) The real stimulus would be to allow the customers to finance their purchase at the reduced rate of 3 or 4%. Allow people to refinance their current mortgages to 3-4% leaving more money to pay down their credit cards or to save, thereby reducing but not eliminating the potential for foreclosure.
I beleive the system of allowing the credit (8000) after closing is good for the economy. If you give it to the purchaser, they might be inspired to do some home improvement, have a strong reserve, or slowly filter its way to the local economy. Helping create demand for goods and services, thereby preserving employment or even creating new opportunities for entrepreneurs.
If you give it at closing the buyers will not see it. Some lenders will find a way to charge them fees, buydowns, charges, points, depleting the potential that the money will ever make its way to the local economy.
Mabel
I disagree
Even though your analysis does show economic progress for the economy it does not take in consideration the additional DEMAND for homes that the stimulus would create.
Housing market is a vital contributor to economic activity. As we all know each time a home is sold cities make their share, the state , REALTORS®, Mortgage Brokers, Home Inspectors , Title Companies, Insurance Agencies, etc.
In addition, when people buy a home it engenders need for paint, furniture and many other household items that will be purchased as a result of that home sold.
It is known that over 70% of the U.S. economy is based on personal consumption. An improvement in consumer spending related on housing will contribute to an upward spiral in the economy. One of the effects is less unemployment.
I believe the Government would like to give each transaction their 8k. However it is a lot easier doing by tax credit. Especially since each transaction is done with different financial products and some even with cash.
===== just my point of view======
:-)
Great post! Food for thought and that's exactly what blogs are supposed to do - stimulate thoughts and ideas. I like your idea and feel that the $8,000 spent on ancillary items is much better than $8,000 to the banks. Kudos for you. It's thinkers like you that DC needs right now -- DO YOU HEAR THAT DC.
Mabel,
Totally agree with you. As real estate broker, of course I want it to be easy for people to buy homes. But, lets not forget, the ease of buying properties is partly what got us into this mess in the first place. The tax credit provides a great economoic incentive that really should stimulate the economy but does not encourage people from buying more housing than they can really afford.
If nothing else - whether we agree or disagree with either of you, it's refreshing to know that CAR leadership has the courage to "debate" about issues that effect all of us - congratulations on creating the dialogue. I love this kind of stuff...
Aside from the fact that doing this will encourage hesitant buyers to buy now or just buy. Buyers like instant gratification and this will excite. The other thing is that they may forget to take this deduction at tax time. Most people wait until the last minute to file their taxes (matter of fact each year I send my clients their HUD's for the past yr. and they don't even know or remember they can write off some of those charges/fee's) then they rush to gather all of their documents...that are usually not in one place. I think this will be a win-win for all of us.
I agree with John, it is refreshing to hear our leadership debating such a vital issue to our industry. But I strongly agree with Mabel. I would not dangle that tax credit in front of those banks. Somehow, someway it would end up as additional revenues disguised as fees and services. It is desperately needed to kick start our faith in this nations economy. There are other ways to spur home sales that is entirely up to the banks. Good, sound, ETHICAL and reasonable lending requirements from them are essential. Greed is good only when it benefits the masses. Not when your hoard it for yourselves. I would go on but it would turn "nasty" political.
Mabel.,
What an interesting debate. Nice going.
My sense is that dead center in the DC political debate is that yes, we want to spur new buyers and encourage "trickle up,' but no, we don't want to go back to the bad old days of no owner equity in home purchases. I hope this is not just smoke and mirrors either. Of course first time buyers can change withholding amounts before and after the closing, but the spirit of the program is. You make the downpayment, according to the underwriting rules, and the program will award you this "credit,' after you close. Use the dough on appliances, repairs, or to 'fix up' your depleted household cash reserves. For me personally, I think it is rare that Repblicans sentiment and Democrat enthusiam 'meet in the middle." But I think that is just what happened on this buyer program, which actually got started with the HERA tax credits last year.. I only wish it wasn't going to close down December 1. We are just figuring the darn thing out! And what if this program begins to turn some local markets around? That helps all sellers, not just sellers to first time homebuyers. If it works in even half the national markets, unending bank losses might reverse.
Mabel,
I have thought about the same issue when this was approved in Washington. It's already easier to buy a home specially in the middle to lower price range. Prices and interest rates are at an all time low, there is a surplus of homes to choose from and FHA is back to the rescue. You can buy with very little ( 3%) down. Now the government is practically refunding buyer's initial investments for purchasing great deals? Why not use that money and help distressed homeowners retain their homes. New buyers are already getting a bargain. Buyers need to have more invested to avoid them from walking away; not less. This seems to be yet another "bright idea" for allowing buyers to purchase with "no money down" or very close to it. The same incentives that participated in getting us into this mess. Nothing new about this plan; same old thing.
There will be people who will use the $8000 to buy down but it will not provide them with any significant lowering of their monthly cost. Many people will use the money for furniture, appliances, decoratiing, accessories and that is what will help energize the economy.
Mabel
If I gave you a home, you will not value it as much as you would have if you invested your hard earned money into a down payment. We gave away homes with 100% financing and we are seeing the result of when you give something away. Everybody benefited, the buyer, the seller and especially the lender, but no value was created. Now, allow the buyer to make the down payment, according to the underwriting rules, stimulate the economy by creating a purchase transaction and enjoy the credit after closing. Let the new homeowner decide whether or not to further stimulate the economy by buying appliances, doing repairs, maintaining a reserve or replenishing savings. Encourage negotiation of closing cost credits to come from the seller or even an incentive from the lender (It could happen...smile). Do not give federal credits to the lenders at closing. Give it to buyers who earned their money and decided to take advantage of lower mortgage rates and use their earnings to purchase a home. Some would argue that the credit is a glossed over “no money down scheme” . The difference is that if you do not bring money to the table to match the underwriting requirements there is no credit. No more coming to the closing table without money. Also anyone who values their invested earnings will not forget their tax credit. Giving the earnest buyer the credit and will help restore the value to home ownership and our economy.
Everything possible needs to be thrown at buyers right now to try to right the market. We have seen lately a huge amount of negativity in buyer sentiments and people are scared right now because they feel they may be overpaying if they purchase a home now. Housing is the most critical industry in this country because of all the ancillary industries it supports. I'm sorry Mabel, but your argument makes no sense whatsoever. Support housing and the economy will come back. The credit is needed immediately along with a Illinois credit that the State legislature is considering. Bad public policy and non-regulation enabled easy loans which created this mess and now the government needs to help right the ship.
Whats the deal with this $8000? Is it set in stone? I just recently bought my first place, is the Gov't going to cut me a check next year for that amount? Also, I agree with you Ms. Treasurer. I would like to wait a year and get that check rather than give all of it to my lender. Thanks
Hello Bobby D.,
You would get the check after you file your taxes. This all depends on your tax liability. This link provided by the National Association of REALTORS has a detailed FAQ http://www.realtor.org/government_affairs/gapublic/american_recovery_reinvestment_act_home#taxcredit
This link is a handout created by the Chicago Association of REALTORS that could help as well,http://www.chicagorealtor.com/associations/6001/files/2009_FHTC_v2.pdf These should help you answering any basic questions you may have. Congratulations on your new home and now BONUS a tax credit pending your tax liability as an incentive to you for your purchase. Also, reach out to any of our REALTOR members who may be able to assist you further.
Mmmmm. Credit here, credit there, credit everywhere. I think analyses surrounding the timing of the credit misses the overall point. What is lacking is not money to buy or houses to sell or even detailed debits and credits to dicker over. The truth is, we're still rich as hell, comparatively speaking. What is missing is confidence, hope and a sense of security. The $8k credit doesn't fix that, either at the closing table or at the end of the year. Further, a buyer who still has to rely on getting pretend money at closing shouldn't be buying. Making that happen is, in part, what got us into this mess. I'm afraid CAR and NAR and all the other ARs ought to be spending more time talking about instilling buyer confidence and calming the fears of buyers as a top priority. The cart, as it were, is still way ahead of the horse.
Hello Carmen, thanks for the comments. I have to say that the National Association of REALTORS has been running ads about this being the best time to buy and will have aradio program starting this spring to focus on market opportunities. Additionally, Capitol Association of REALTORS located in Springfield have also been flooding their market with their slogan "Good time to buy, ask me why". Our local Association C.A.R. has been doing spots on WBBM radio as well. Informative real estate pieces to better educate the public. As an industry we do not control, unfortunately what gets reported in the mainstream media. Hard to combat with these juggernauts that have an operational mindset of "If it bleeds it leads". Housing has had a tough time and the stories they cover do not necessarily create any kind of confidence; not in housing. We all have to participate in this echo chamber one cient at a time. I suggest we all get our talking points together and educate consumers about the greate opportunities; even if it's one at a time.
Dave and Mabel both have good points. Speaking as a lender, I favor the $8000 credit at closing in order to allow the buyer to take a check home from closing. The underwriting guidelines will not be changed, with or without the $8k credit. The buyer still needs to demonstrate full doc income, their own seasoned assets and reserves, and 680+ FICO scores in most cases. Dishonest lenders and mortgage bankers will be dishonest with or without the $8k credit, and the consumer is smart enough to know better in the majority of cases.
To me, the $8k credit provided at closing provides the buyer AND seller more options to craft a win-win contract, and to excite the first-time homebuyer market, especially in an economy where they worry about their job.
I would amend the $8000 credit to apply to ALL buyers, including investors, who are confident enough to pull the trigger and buy, and the residual effect will spill over to the first-time homebuyer and they too will buy. When that happens, the supply will begin to evaporate.