Tuesday, September 29, 2009

Will the Homebuyers Tax Credit be Extended

Just last week I posted an entry to my blog with last minute tips for people hoping to take advantage of the expiring first time homebuyers credit. However, as the deadline to claim the credit gets closer and closer, more experts are predicting that Congress will pass some type of incentive extension within the next few weeks. In fact, there are reportedly over 5 bills currently being considered by the Senate and House of Representatives.

Effect of Current Credit

Although it is difficult to measure the exact effect of the current credit, many people assert that it contributed to the leveling off of the recent housing market crash. According to the IRS, over 1.4 million American families have taken advantage of the credit so far. Another 400,000 are expected to by the end of the year. This total represents a sales increase of around 10% from last year.

While this does represent a decent increase, it is not clear if the increase was because of the credit or not. Mike Larson of Weiss Research claims that low prices and reasonable rates of 30-year fixed mortgages have made more of an impact than the Federal government’s tax credit. He refers to it as “the icing on the cake, not the cake itself. Falling home prices have worked their magic. That's why we are where we are."

Multiple Bills being Considered

As I mentioned before, there are already nearly half a dozen bills being considered by Congress. The most popular bill simply extends the current credit’s deadline from November 30th, 2009 to May 30th, 2010. However, there are other variations that would expand the credit even further. One seeks to raise the value of the credit from $8,000 to $15,000 while others would change the credit so that all homebuyers, as opposed to just those who have not purchased a house within the past three years, can take advantage of it.

Economy Still in Trouble

The main reason that supporters want to extend the bill is simple: the economy is still in trouble. Without a tax incentive, U.S. home sales will drop in 2010. Specifically, many are worried that sales during the winter months (when real estate activity is typically low) will plummet and put our economy back into trouble. Senator Isakson from Georgia, who actually worked in real estate before running for office claims “December through February is historically the worst time for home sales anyway because of the winter months, so with the credit ending November 30, you have a double whammy.”

Popular Credit

In all honestly, one of the largest reasons Congress is considering extending the credit is because of its mass popularity. Politicians are always thinking about their next reelection, and supporting legislation that is popular among your constituents is a great way to get reelected. Average taxpayers are always claiming that Congress does not do enough for “main street Americans” extending or expanding the current credit would be a great way to please them.

Opposition to Extension

There is quite a bit of opposition to extending the credit. First and foremost, there is concern over its costs. The first credit was passed in a state of economic emergency. Americans were frightened that the banking system would collapse, and that the housing marketing would crash entirely. Therefore, Congress was able to get the credit created without much debate about the costs. However, when you look at the math, this credit has already been very expensive. If 1.4 million families have already taken advantage of the credit, and 400,000 more will before it expires, then we are looking at a total cost of nearly $15 billion. Additionally, experts are worried that excessive credits will be the first step in creating the next real estate bubble.

Heavy Industry Pressure

Another thing to consider when examining the housing credit is the amount of pressure real estate and construction lobbyists have put on Congress. The National Association of Home Builders, The National Association of Realtors, and even the Business Roundtable (an association of chief executives) have all published statements promoting an extension of the credit. They are also pushing for lower interest rates, and an extension of the limits on loans eligible for government backing or purchase

Likelihood of Extension

With all of this debate about whether the credit has worked or not, what exactly are the odds that the credit will be extending? Lisa Poole of Time Magazine says there is a 2 to 1 chance that it will be either extended or expanding, but I would say that the odds are probably better than that. I doubt that it will be increased to $15,000, but I am pretty confident we will see some type of extension on the $8,000 credit for first time homebuyers.

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