Home Buyer Tax Credit, Two Words... Whooptie. Doo.

So, here's my deal.  My wife and I are still renting.  We got married about a year and a half ago, and decided at that time that, for a variety of reasons, that it made sense for us to rent.  Most of the reasons were with respect to our personal situation.  For example, we had difficulty deciding on a location that made sense for us to buy.  Also, we wanted to enjoy our first year of marriage with a bit of discretionary income.  We knew that buying property would eat into that discretionary income.  Of course, another significant reason was that prices in Southern California were dropping rapidly, and we didn't feel that this was going to come to an end anytime soon.

This was in 2008.  At the time, there was a First Time  Home Buyer Tax "Credit".  The quotes around credit, because the credit was really a loan that had to be repaid over the next few tax years.  Then, of course, they came out with the new and improved version in 2009, an actual First Time Home Buyer Tax Credit.  Note the removed quotes.  They removed the repayment requirement, thus making it a true tax credit.  Recently, in a big coup for the Realtor lobbyists, the tax credit has been both extended (to home purchases closed by June 30, 2010) and expanded (to "move up" buyers).

Of course, there are limitations on who can use the tax credit.  Phase out begin around $125k for singles and $250k for couples, and the house must be your primary residence.  There's more, so go to the Federal Housing Tax Credit site to learn more.  If you qualify, and close on a house by June 30, 2010, you get a credit of $8,000 for first time buyers, and $6,500 for "move up" buyers.

Whooptie.  Doo.

Here's my take on this.  How expensive is the house that you are thinking about buying?  I can tell you that my wife and I are in the $400,000-$500,000 range.  It's a broad range, I know.  And believe me, I would rather stay on the lower end of the range, but this is Los Angeles.  So, let's say we are looking at houses that are $400,000.  Maybe it's a townhouse, just to make this plausible.

The tax credit amounts to a whopping 2% of the sale price.  In the meantime, realtors are talking this thing up like it's apple pie!  It's generating a considerable amount of buzz among folks who have been on the fence about buying.  In short, demand is up because of this tax credit.  What happens when demand is up?  Hmmm...  that's right, prices go up (or are prevented from going down).

Now, keep in mind that it is not necessarily artificial demand.  It's actual demand, from people who are actually probable buyers of houses.  However, what it has done is move the time line of those buyers from some point in the future to now.  This creates a lot of problems.

First of all, there is the artificial price inflation in the near term.  Or, in the case of real estate in 2009, the artificial price lack of deflation.  This means that those who were ready and planning to buy in 2009, may be facing higher prices than would otherwise be the case.

Second, it robs the end of 2010 and later of demand that should exist for that time period.  If we are incenting buyers who would be ready to buy a year or a year and a half from now to consider buying now, it takes them out of the buyer pool of the future.  Is there a likelihood that buyers from 2012 will buy in 2011?  I don't see it.  Why would they?  This means lower than would otherwise be the case prices in late 2010 and into 2011.

Third, it creates artificial economic activity in all real estate related sectors.  As people buy houses, the realtors, mortgage brokers, escrow agents, furniture stores, moving truck renters, etc. all benefit.  However, this benefit will be short term.  By artificially bolstering these jobs in the short term, it prevents the natural order of labor markets to encourage these folks from career changes or obtaining new job training.  I know short term stimulus of jobs, and economic activity is the goal, but it doesn't make it a good thing.

I don't have a fourth.  That's all.

Ultimately, I look at this through the lens of my own life.  Is the possibility of utilizing the $8,000 First Time Home Buyer Tax Credit a good thing or not?  My conclusion is that it is not.  Do I believe that this bolstered demand has kept prices 2% higher than they would otherwise currently be?  Absolutely.  Call me crazy, but I would rather pay 3% less, and forgo a 2% tax credit.

And don't get me started on cash for clunkers...

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