Possible Tax Credit Extension.....And My Opinion

I just read that there are bills pending in both the House and the Senate to extend the first time home buyer credit of up to $8,000 which expires on November 30 of this year. If you want my opinion, then make sure to read to the end.

The Senate version, co sponsored by Chris Dodd (D-Conn) and Johnny Isakson (R-GA), would extend the tax credit to up to $15,000 and make any owner occupant home buyer eligible. Senate majority leader, Harry Reid (D-NV), is in favor of extending the tax credit as it stands currently which is 10% of the purchase price up to $8,000 for first time buyers or someone who has not owned a home in at least 3 years.

The article that I read indicates that the most likely scenario is one where a tax credit would be the same as it stands currently at 10% of the purchase price up to $8,000, but open to all owner occupant buyers instead of just 1st time buyers.

My Opinion:

As a REALTOR, I have benefited from the 1st time tax buyer credit. It has infused into the market place of home buying, a number of 1st time buyers that may not have otherwise been buying thus keeping me busy selling houses both on the listing side and on the buyers side. Maybe we needed that first credit to stave off something much larger than what we have gone through....or maybe not.

But is this new tax credit really a good idea? Was it a good idea in the first place?

We just went through a "Housing Bubble" due to putting too many unqualified buyers into home ownership. By doing this, it created a housing demand. When demand is high, prices go up. But it was an artificial demand. Putting people into homes that should not have been able to buy a home is an artificial demand. Now we are dealing with a large default rate and a saturation of the market with all of these homes that have been defaulted on.

Now, don't get me wrong, there are a lot of people that defaulted that were not in the sub-prime category. They defaulted because of rising unemployment, divorce, lack of good health care causing large medical bills....there are a lot of reasons why people default. But this mess started with the sub-prime loans.

With the sub-prime loans gone, unlike before, these new buyers are qualified buyers that probably moved up their timetable of buying to take advantage of the credit. But isn't the $8,000 credit just inflating the price again?

This "Crash" in the housing market that we are seeing, is the market adjusting itself from being over valued. If we offer $8,000 or $15,000, as one bill suggests, aren't we just inflating the market again? Causing a demand when there should not be a demand?

Why do I say "when there should not be a demand?". I know this person that is not in love with his house, he thinks his house is just ok, but he does not need to sell it. He is settled into it. If this tax credit for everyone goes into effect, especially the $15,000 credit, then his house is going up for sale and he will be building a new house somewhere. Who is this person? It is me. Isn't that artificially putting me into the market, when I had no intention on being in the market? Just because I may disagree with the government giving out this credit does not mean that I will not take advantage of it.....because I will, and others will too.

The other big question is: What is going to happen when this credit goes away? It seems to me that we just are putting off the inevitable of a really really slow real estate market. When you give people incentives like this, they grow to expect it. Just look at the car industry. For years and years, the only way American car makers have been able to sell cars is by giving huge rebates on their product-something that our government just found out with the "cash for clunkers" that brought a lot of buyers onto car lots. In the housing industry, we are in danger of creating the same type of mentality. Several times per week I am asked about a zero down or sub-prime mortgage as a way to buy a house. Most zero down and all sub-prime has been gone for almost 2 years and people are still asking for it. People are looking for the edge or the loop hole. Zero down does have a place, just not to those with poor credit. And it is typically those with poor credit that are asking for those programs.

So, what is my solution if there is no tax credit?......Smart and responsible lending programs that reward people with great credit but don't eliminate as many buyers that our current programs do. In my opinion, there is no reason why someone with an 800 credit score should not be able to buy with zero down if they would like to. I feel that someone with a moderate score, say in the 680 to 720 range, should be able to buy with very little down--like 2% down. Those with a 580 to 679 need to put 3.5% to 5% down. You reward those with the good credit with lower rates. I also feel that banks should allow closing costs to be wrapped up into the loan without a penalty in the interest rate and that down payment assistance programs were not necessarily a bad thing. I know this will not create the number of buyers that are out shopping because of the tax credit as there is right now, but is that a bad thing?

Lets use our tax dollars for giving health insurance for those in need of it. After all, it may very well be the leading cause of bankruptcy in this country which is something that we all pay for. Lets use our tax dollars to build the finest schools possible. If we do those 2 things, I think you will see far more wealth in this country. And if there is more wealth, there are more home buyers.......But that is just my opinion. And I know that this idea would not create a fast enough response in this "give me now" society that we live in. I know that this post will probably not be too popular with my fellow agents, but it is my opinion. And if the government passes a new tax credit, I will push the heck out of it because I need to make a living. But this blog was created in part to voice my opinion, which is what I have done. Feel free to let me hear yours by leaving a comment.