October 23, 2009 / 7:38 PM / 10 years ago

First-time home buyer tax credit: worth the cost?

NEW YORK (Reuters) - The seller’s New York City apartment had been on the market for nine months. The buyer had looked for nine months, always finding a reason not to commit.

But with the November 30 expiration of the first-time home buyer $8,000 tax credit looming, the buyer finally made an offer. The seller was amenable. A deal was struck.

“The buyers I’m working with were looking at apartments and debating whether to buy,” said Adina Greenberg, a real estate agent at The Corcoran Group, the largest residential real estate firm in New York City. “Knowing the first-time home buyer tax credit was ending, they decided: ‘Let’s do it now.’”

For many of the clients Greenberg and her colleagues work with, expiry of the tax credit is the push they need to go through with a purchase.

That leaves a dilemma for the U.S. government, which has been trying to help a recovery in the housing market: should the credit for first-time buyers be extended, expanded, refocused or allowed to expire?

The U.S. housing market crisis, which began more than three years ago, helped drag the United States and the global economy into recession. With a sharp fall in U.S. house prices, and low mortgage rates, the new home buyer tax credit has helped the market show signs of a turnaround. The question is whether it played a real supporting role or a mere bit part.

GIVE ME CREDIT

Both Treasury Secretary Timothy Geithner and President Barack Obama’s economic adviser Lawrence Summers told Reuters this week the question of whether to extend the credit would be examined in the context of its utility and cost.

Unsurprisingly, the real estate industry is lobbying to give the credit another lease on life.

The National Association of Realtors (NAR) is urging members to e-mail elected officials to “extend and expand” the homebuyer tax credit. The NAR says nearly 170,000 people have contacted their Congressional representatives so far.

The National Association of Home Builders was quick to link a slight dip in its NAHB/Wells Fargo Housing Market Index in September to concern about the credit’s scheduled expiry.

“The approaching expiration...combined with the massive hurdles that builders face in obtaining construction financing ... could derail the fragile recovery in housing just as it is starting to take shape,” said NAHB Chairman Joe Robson.

Home prices in 18 of the 20 metropolitan areas in the S&P/Case-Shiller index have risen for several months. Inventories of unsold homes have receded but remain high.

For a graphic on U.S. home prices and consumer confidence, click here

As a house-warming gift for a new mortgage-holder, the credit is also a mild stimulant for economic sectors that benefit when new households form.

“Buyers can use the credit to buy furniture they might otherwise not have been able to afford,” Greenberg said.

To the extent that the credit helps to stabilize the broad housing market, that is good for the economy because stability in home prices helps consumer confidence, which in turn can boost spending, economists said.

“The S&P/Case-Shiller home price index broadly captures the ups and downs of consumer confidence measures,” said Cary Leahey, economist at Decision Economics in New York.

WASTE OF MONEY?

But critics of the credit question how much value it really delivers for the cost. The direction of mortgage rates and the health of the job market will have the broadest, and most profound impact, on the housing market, they note.

Skeptics also say most of these home purchases would have been made anyway, though perhaps not as promptly.

The money spent on the credit could be spent better, focusing it in communities already hurt by foreclosures and vulnerable to even more, some policy analysts believe.

“In about four out of five cases, the tax credit went to people who would have bought a home anyway, so that means the real cost of getting that one extra buyer into the market is five times $8,000 - about $40,000,” said Andrew Jakabovics, associate director for housing and economics at the Center for American Progress, a Washington, D.C.-based think tank.

“A better idea would be to take that $40,000 to pay an absolutely critical housing counselor to help lots of people work out a loan modification, saving multiple homes from foreclosure on a continuing basis,” Jakabovics said. “If the idea is to stabilize the housing market, we can do that more effectively by preventing foreclosures, rather than persuading marginal buyers to enter the market.”

Economists also say the new credit just adds just one more subsidy to the government’s already vast subsidy of private home ownership through the nearly unlimited tax deduction for mortgage interest, a deduction that does not apply to interest charged on student loans, medical bills or other consumption.

And the Obama Administration has other efforts high on its list of priorities. In recent Congressional testimony, U.S. Department of Housing and Urban Development Secretary Shaun Donovan said there were other ways to help the housing market.

“With health care costs the leading cause of personal bankruptcies - with some estimates finding that almost half of all foreclosures are caused in part by financial issues stemming from medical costs - reform (of the nation’s health care system) is an important part of stabilizing the housing market,” he said.

Editing by Andrew Hay

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