US tax credit a permanent liability?

Source : Business Times – 17 Sep 2009

When the US Congress passed an US$8,000 tax credit for first-time homebuyers last winter, it was intended as a dose of shock therapy during a crisis. Now, the question is becoming whether the housing market can function without it.

As many as 40 per cent of all US homebuyers this year will qualify for the credit. It is on track to cost US$15 billion, more than twice the amount that was projected when Congress passed the stimulus bill in February.

In the view of the real estate industry and some economists, all that money is well spent. They contend that the credit is doing what it was meant to do, encouraging a recovery in the housing market that is gathering steam. Analysts say that the credit is directly responsible for several hundred thousand home sales.

Sceptics argue that most of the money is going to people who would have bought a home anyway. And they contend that unless it is allowed to expire on schedule in late November, the tax credit is likely to become one more expensive government programme that refuses to die.

The real estate industry, including the powerful 1.1 million-member National Association of Realtors, wants Congress to extend the credit at least through next summer. The group hopes to expand the programme to US$15,000 and to allow all buyers, not just those who have been out of the market for at least three years, to qualify. The price tag on that plan: US$50-100 billion.

Joseph and Chassity Myers are among the two million buyers eligible for the credit this year. The newlyweds heard that they could get money from the government for something that they were tempted to do anyway.

‘It was a no-brainer,’ said Mr Myers, a commercial underwriter. ‘Owning something is the American family dream.’ The couple bought a two-bedroom condominium here in the spring for US$171,000 and amended their 2008 taxes immediately, receiving their windfall by direct deposit a few weeks later.

Their home is now a monument to the government’s generosity. They bought a leather couch, a bed, television stand, china cabinet, kitchen table, coffee table, grill and patio set.

‘We did exactly what the government wanted us to do,’ said Mrs Myers, a third-grade teacher. ‘We stimulated the economy.’

Mortgage applications increased nearly 10 per cent for the week ending Sept 3 from late August, the largest gain since early April and the latest of many signs of life in real estate. The upturn can be attributed to several factors: the return of confidence, very low mortgage rates, and prices in some markets that are at decade-low levels.

But the looming expiration of the tax credit on Nov 30 seems to be playing a role too, particularly in relatively low-cost markets such as Phoenix, Las Vegas and Dallas.

The 50-year-old complex that the Myerses live in, grandly named the Lawn at Bluffview, provides a snapshot of the credit’s influence – and limitations. Two years ago, the buildings were converted from apartments to condominiums by their owner, a local developer. In January, before the credit, only 30 of the 70 units had sold.

Since then, another seven units have sold, including the one bought by the Myerses. Brian Denbow, who works for a sub-prime car financing firm, also was spurred to action by the credit. He too intends to use the money for furniture. Five of the buyers did not qualify for the credit for various reasons.

The Lawn at Bluffview remains nowhere near full. Potential buyers ‘just want a deal’, said the sales agent, Beverly Bell. Two weeks ago, the price of the unsold units was cut 10 per cent.

The National Association of Realtors estimates that about 350,000 sales this year would not have happened without the lure of the tax credit. Moody’s Economy.com used computer modelling to put the number at 400,000.

Economists are sharply split on the merits of another round of government help.

Mark Zandi, chief economist of Moody’s Economy. com, favours expanding the credit to all homebuyers, even investors, into next summer. ‘The risks of not doing something like this are too great,’ he said. ‘I don’t think the coast is clear.’

James Glassman of JPMorgan Chase echoed those views but said that he favoured continuing to restrict the credit to first-time buyers.

On the other side of the issue is the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute. It labelled the original credit as one of the worst provisions of the stimulus package, on the grounds that the money is a bonus for people who would buy a house anyway. The centre has an even dimmer view of extending the credit to all buyers.

‘Is this the best way to spend money we don’t have?’ asked senior fellow Roberton Williams.