Monday, August 18, 2008

First-Time Home Buyer Tax Credit: Positive?

Real estate professionals, home builders, owners, and many others hope that the new tax credit for first-time home buyers will spur on the housing market out of the state of doldrums it now finds itself in.

While a similar tax credit boosted the housing sector in the 1970’s, a key difference comes with this year’s $7,500 tax credit: it has to be repaid, which turns that credit into the likes of an interest-free loan that must be repaid over 15 years.

According to the National Association of Home Builders website, in order to receive the credit, the closing has to occur before July 1, 2009.

Sounds good, right? I’m not sold…

1) You still have to repay the “credit”. This could end up getting people in trouble if they stretch themselves thinner than they should. Also, many will claim that they did not know it had to be repaid and will likely spend it as such.
2) You don’t receive your “credit” until you file your taxes, unless you change your withholding in the current year (which will raise your take home pay).
3) How much impact will this really have? I don’t foresee home prices halting their decline. I’m going to be potentially in the market for my first home in the near future, but with prices continuing their descent, I’m content to wait for the bottom (even if I do miss the exact bottom by a few months, I don’t feel that we’re there yet). Even Alan Greenspan, the former Chairman of the Federal Reserve believes that we are nine months away from the bottom. Why would someone jump in now? If it turns around, they’ll be right there to jump in (remember, they don’t have houses to sell and can react fairly quickly to market changes).

What would make this work? The answer seems obvious: treat this as a true credit and not an interest-only loan. In other words, don’t require repayment. But is that really the remedy of best choice? To have the government involved in propping up artificially high prices rather than letting the market complete its correction? Not to mention, pumping more money into the economy without production breeds further inflation, does it not?

All in all, I see this tax “credit” as having very little impact and simply adding to the complexity and confusion of our tax code (which is why I believe in proposals to eliminate the income tax and simply go with a national sales tax – but that’s another post!).

So, Everyman, what does this mean to you and your common sense financial decisions? First of all, this whole meltdown should remind us that we shouldn’t overspend our means. People are foreclosing because they thought that if they stretched themselves out, the market would continue to climb and they’d be able to win their gamble by selling for a higher price and taking a profit. But obviously that didn’t work out so well. Instead, it left millions without the ability to pay for their mortgage. And while the government is doing its best to bail out those that were greedy with their money, you shouldn’t put yourself there in the first place.

Be smart with your money. If you can’t afford it, don’t buy it!

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