The government’s $8,000 tax credit to new homebuyers has been under a lot of scrutiny in recent months. The tax credit was designed to help stimulate the housing market and lead to increased home ownership. To that end, it has been extremely successful. However, abuses within the system appear to have also been quite high. While the reverse mortgage industry found itself under scrutiny for what appear to be under about a dozen complaints, the federal government has started 167 criminal investigations and 107,000 civil investigations into possible fraud. Of the 1.4 million people who claimed the over 10 billion dollars in tax credits in 2008-2009, 60% had incomes under $50,000– leading to questions as to whether they could even afford a home.
The new homebuyer tax credit has certainly had many positive effects. Of the 1.4 million home sales, 350,000 to 400,000 were estimated to be a direct result of the credit’s availability. That accounts for 25-30% of the eligible home sales. In some areas, real estate agents have reported that up to 70% of their clients were considering buying a home as a direct result of the tax credit. With sales of existing homes at their highest level in two years, many are attributing the strong numbers to the tax credit, which expires November 30. Sales increased 9.4% in September according to the National Association of Realtors.
So which is it? It seems that the tax credit likely has had a positive effect on the market. However, the rock-bottom prices and increased inventory have also likely contributed to many first-time buyers choosing to enter the market. The increase in first-time homebuyers is a good sign for the real estate industry, but it is still a disconcerting one. If 60% of the 1.4 million people who claimed the tax credit from 2008-2009 had incomes of under $50,000, could they really afford to own a home? Will we see another foreclosure crisis within the mortgage industry down the line as these homebuyers are faced with rising rates or declining incomes? The answer to these questions remains to be seen.
While the pros of the tax credit may outweigh the cons, with the damage to the real estate industry wiping out the savings of many throughout the country, if the credit is extended, it should be done so with caution. While the image of every American owning a home is a promising one, the government has an obligation to ensure that those owning homes can actually afford to do so. Otherwise, history is at risk of repeating itself.
Sources: The New York Times: Home Tax Credit Audit Shows Abuses
The New York Times: Tax Credit Lifts Home Sales to Two-Year High
The Associated Press: Northeast Home Resales Post 11 Pct Annual Increase
The Senate announced a bi-partisan deal yesterday to extend the new homebuyer’s tax credit through April 2010. The deal will extend the $8,000 tax credit, which was set to expire in weeks, on homes with values up to $800,000. While the previous tax credit only applied to homebuyers with salaries of up to $75,000/year for individual and $150,000/couples, the deal raises the requirement, so that the tax credit will now apply to homebuyers with salaries of up to $125,000/year for individuals and $225,000 for couples. This will serve to make the vast majority of homebuyers available for the tax credit. In addition, a new $6,500 tax credit will be available to home owners wishing to move out of their current homes into more expensive ones.
