The first-time homebuyer tax credit is coming to an end rapidly. Although several bills have been introduced to the congress to extend and even expand the first-time homebuyer tax credit Americans should ask if this program is worth its cost.
First-time home buyers who purchase homes between January 1, 2009 and December 1, 2009 could qualify for an $8000 tax credit if it is their first home [details]. The government had introduced this bill to speed up the recovery of the real estate sector and it is now set to expire on November 30th 2009.
Was it Worth the Cost?
The overall estimated cost so far is USD15 Billion; this is well more than twice the original budget for the program, but was it worth this cost? There are arguments on both sides. The Real Estate industry is arguing that this tax credit has been vital to the recovery of the real estate market, according to the IRS 1.4 million families have already taken advantage of this $8000 tax credit and The National Association of Realtors is estimating that we could see an extra 350,000 home sales.
It’s not just the real estate market that benefits from this tax credit, but other sectors benefit indirectly as well. Once the first time home buyer has closed the deal they will go on and purchase new furniture, kitchen appliances, perhaps renovate and so on. So there is a spill over effect into other sectors, which can speed up the recovery.
In my opinion while the program may have spurted the sales in the real estate market, it could have a damaging effect on the sector in the future. Those who had planned to purchase a home in the future became homeowners earlier due to the credit; this could mean less potential buyers in the future. The credit may have had an immediate positive effect, but I doubt if it benefited the real estate market for the long term.
After taking everything into consideration, including the fact that the program cost ($15 Billion) double the original budget (seems like the government is in need of some economists as they keep underestimating their spending on bailout plans), I think it did what it was suppose to do in the short run. It stimulated the real estate market and stopped the free fall in the short-term; however in the long run I think there could potentially be some dangerous consequences. The fact that this credit can be used as a down payment in the FHA program increases the risk of foreclosures in the future as it becomes a $0 down loan and those with negative equity in their home tend to go into default.
What do you think was the program worth it? Will it help in the long run or was it just an expensive short-term stop?
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It’s hard to say if the long-term effects of this program are worth the cost. I tend to agree with all of your points, including that it did what it was supposed to do in the short run. I will be taking advantage of this tax credit. However, it didn’t “stimulate” me to purchase when I wouldn’t have otherwise. The only effect it had on my personal situation was moving my closing date up one to two months. In a sense, the government is giving me 8K for something I was going to do shortly anyways. While I will take the credit, it does seem like a waste of tax payers $$$ when given to people in my shoes.
The $8000 is nice when you qualify.
First, I have personal interest in this program. My daughter was able to get her tax credit earlier this year and my step-son is actively looking for a home (but may not be ready to move in time). Additionally, my house is on the market.
It seems the boost in sales has come mostly at the low end of the market. What I’ve seen is that home sales below $150k and to a lesser degree between $150k and $250k are up compared to a year ago. But home sales above $250k (mine is in that category) are still down.
I have yet to hear any official report on what happened to the auto industry after cash for clunkers. I read several reports that similar programs in other countries saw a drop in sales after the program. I suspect that happened here (but has yet to be reported) and I suspect that will happen to the housing market as well.
Long term effect? I’m on the fence. I’m not sure we can ever know what would have happened if we hadn’t done the tax credit.
If you compare it to the cash for clunkers program there is a pretty solid chance of a large drop off in home sales when the program ends. Dealerships have gone from record sales to little sales after the clunkers program ended. Just my two cents