Housing Tax Credit: Take Two

Second verse, same as the first, a little bit louder, a little bit....better?

The word is out on the new housing "tax credit" compliments of the Obama administration. The bill looked too good to be true coming in, and endured a good trimming before an end result was reached. The lighter bill will certainly be cheaper for the government (and us, our money after all).

First things first. The amount was cut from $15,000 to $8,000, bringing it closer in line to the false "tax credit" we currently have. The reduction in cost means they could in theory serve more people and will keep the whining down from those who purchased last year and only qualified for the $7,500 interest free loan version.

This brings me to my second point. This one is a genuine credit. It is fully refundable, meaning even if you have no tax liability you can get paid the full $8,000. Since it is a credit and not a tax deduction we are talking dollar for dollar benefits.

While the reduction from $15,000 to $8,000 may seem like a big deal, it isn't the most important change made in the bill. That honor goes elsewhere. The senate version allowed the credit to be claimed by any home buyer who purchased during the time frame. The house bill, the one ultimately adopted, limits this to first time home buyers who purchase from 1/1/2009 to 11/30/09. This cuts the majority of those who might have claimed the credit out of the picture. Think of it this way. Bob the first time home buyer purchases a home from Ted...who is buying a house somewhere else from Jerry, who is buying a home in the city where his new job is etc... Under the senate plan all of these individuals would claim the credit. Under the new bill only Bob gets the credit. The limitation may keep some homeowners, who would have viewed this as an ideal time to purchase somewhere else, sitting on the fence while waiting for the market to stabilize.

Now, what do I think of the above? Well, it certainly is cheaper! I am guessing the cost of the new bill will be 1/5 or less of what he old one would have cost us. This would be good news if I didn't believe that the money will simply be spent elsewhere rather than "saved". If if is for rum exports to Puerto Rico, as some of the stimulus package is, well, I can't help but think it would have been better spent in the housing tax credit.

What will it do? Some are estimating as many as 300,000 first time home buyers will take advantage of the incentive and take the plunge. Sadly, this is only a drop in the bucket compared to the number of foreclosures we are seeing. Heck, households lost more jobs in the last couple of months than that paltry number! It will benefit a few...it won't do much to stimulate the economy (a familiar refrain the more I look at the "stimulus" bill).

Other problems remain as well. The credit does nothing to address the issue of down payments. Our savings rate has been ridiculously low over the last few years...how many of those first time buyers have actually saved anything at all? Are they purchasing homes with no money down....at with 100% LTV ratios....haven't we been down this road before? There is a reason private mortgage insurance exists (the insurance the borrower pays if they have less than 20% down payment, this insurance protects the lender). It exists because studies show that those who make smaller down payments are more likely to walk away from their home and/or let payments lapse.

Proverbs say that "Where there is no vision, the people perish". Until we catch the vision of personal responsibility and SACRIFICE, understanding that a home is something to be worked for and not a right, I think we will continue to see home owners perish.

I am going to pretend it is my bill now. The credit is only available in the form of a match, 2:1, for what the family is bringing to the table. They want $8,000, they better bring $4,000 for down payment. What about those who don't have it? They could set up a plan with a bank to save X number of dollars a month to reach their goal, and those who enrolled during the time frame of 1/1/09 to 11/30/19 and stick to their plan would still qualify for credit. For example: Bob wants to buy that house, but hasn't saved a dime. He decides to he can save $150 a month. He sets up a savings account with Wiser Bank and commits to saving $150 a month for the next 27 months. At the end of 27 months he has his downpayment, and his $8,000 match. This won't do much to stimulate the economy now (if anything saving money will hurt it a bit) but in the long run I think it is a smarter move than throwing good money after bad and allow potential homeowners who can't buy now a chance to work towards it in the future. I suspect those who worked and sacrificed to get the credit are more likely to make their payments than those who got $8,000 back from Uncle Sam with no effort and used it to pay for their new living room furniture.

The second thing I would require is education. Home buyer education can help them actually understand the documents they are signing, avoid being taken advantage of by sellers, ensure they have a budget (in theory, they still have to choose to follow it), and help them understand what to do if they fall behind on payments (or even think they will). If they don't want to get education....they can find their own $8,000.

In the meantime we won't see this make much of an impact. Some might buy homes who wouldn't have. Some of them might spend the $8,000 they get from Uncle Sam, and thereby stimulate the economy that much more. Maybe a third verse is in order....Third verse, where is the harm, give it one more shot, third times a charm.

Too good to be true? The truth behind the housing tax "credit"

The Housing and Economic Recovery Act of 2008 announced a new tax "credit" allowing qualified first-time home buyers purchasing homes on or after April 9, 2008 and before July 1, 2009 to claim up to $7,500 on their taxes. The credit is a dollar for dollar reduction for taxes paid (rather than a deduction from your taxable income) but the term credit may be a bit deceptive.

You see, unlike any other tax "credit" that I can think of, this one has to be repaid. The credit truly acts like a zero interest loan that is repaid over the next 15 years, or when the house is sold if there is sufficient gains. So if a family claimed (ie borrowed) $7,500 they would repay that by owing an additional $500 on their taxes each year for the next 15 years.


An interest free loan is a good thing though, right? It can be, if used constructively. My beef lies in calling it a tax "credit". You don't have to repay your earned income tax credit, or child and dependent care tax credit. In fact, I can't seem to find a single "credit" that you have to repay.....except this one, which makes the name all the more galling. It seems that it sets the stage for an expectation, free money because it is a tax credit, when in fact it is nothing of the sort.

Won't borrowers take the time to learn the rules and read the fine print so they won't be surprised when they owe $500 more on their 2010 taxes? If we have learned anything from the market meltdown we shouldn't even have to ask this question. So lets look at the possibilities of how this "credit" could impact families now.

Lets start with the good. We will assume a family actually owes $7,500 in taxes and will therefore be able to claim the whole credit. In our current economy this could be a fantastic boon for a household in distress. If they are struggling to make ends meet they could use this to make up the difference rather than turning to a high interest credit card or insane interest payday loan. They could use it to pay down existing debts and bills, leveraging the no interest loan in a smart way to wipe out high interest payments and freeing up cash reserves. It could even act as emergency savings for the family, they could sock it away for a rainy day to help cover medical expenses or vehicular distress. This is a great tool for families.

If they spend it that way. Remember, part of the reason the government is providing the money in the first place is to stimulate the economy. They want them to spend it. If they spend it to make ends meet, the family is helped, and the government gets what they want. If it is used to pay down debt, it has little impact on the economy (unless it frees up money for the family to spend in the future by reducing payments). It could however be used for our favorite past time, increased consumption. Increased consumption implies we are spending more than what is required to meet our needs, and all too often in a world of instant gratification this is the way of most financial windfalls. Many households have developed the habit of spending the tax return frivolously, why should we expect them to approach this larger windfall any differently? If the money is spent on increased consumption then the family has not "gained" anything, they are simply spending today what they could have spent tomorrow...for the next 15 years.

Regardless what the initial $7,500 is spent on, lets look at the other end. For the next 15 years the family will owe $500 more on their taxes. Will families even remember to take this into account in 2010? What impact will this have on our spending for the next 15 years in and around tax time?

What about the other option? What if I sell my home and the government wants their money back? Profit from the sale is subject to recapture up to the amount claimed. My concern here is the fact that many homeowners put little to nothing down in the first place, and as such when they go to sell one or two years later, especially with the current home appreciation rates ;) there may not be much, if any, profit from the sale. When you pay off the $7,500 on top of that (or whatever is left over based on how long you have been shelling out $500 a year for)....I suspect many homeowners will have little to nothing to show for their time in the home unless they stay for five years or more. This means no down payment for the next home, meaning if they want to keep being a home owner they will have to look at another low to no down payment loan....haven't we been down this road once before? Or they could go back to the renting. Either way the family has made no progress.

It all comes back to how it is sold. The US government gets grumpy with businesses for false or deceptive advertising. How is this any different? It could have been called many things, a tax refund advance (implying a loss of future refunds) or most appropriately, a no interest first time home buyer loan. What it never should have been called, is a credit. They are not freebie bailout bucks. Do you think the Better Business Bureau accepts complaints against the US government? No matter what we say on the side of the package, its the contents that matter most.

The most confusing part of all? The proposed new housing tax credit doesn't look like it will have to be repaid at all. But we will call both of them credits, just to make things clear ;) .