Senators Agree to Extend Homebuyers Credit

• October 29, 2009

by Mark Wellborn

The first-time homebuyer tax credit is one step closer to being extended. Yesterday, Senate Majority Leader Harry Reid’s office announced that Senate Democrats plan to extend the $8,000 credit and also provide additional benefits for a select group who already own residences.

In short, the proposal would extend the credit to home purchases under contract by April 30, 2010 and it would be available to individuals earning up to $125,000, or $250,000 for couples, up from $75,000 for individuals and $150,000 for couples under the current law, according to Bloomberg News. The proposal would also let homeowners qualify for a $6,500 credit if they have lived in their residence for five years.

While this all could be good news for homebuyer’s, the extension is still a ways from becoming a reality.

From the Associated Press:

Senators in both political parties were hoping to add both tax provisions to a bill that would give people running out of unemployment insurance benefits up to 20 more weeks of federal aid. The Senate could vote on the overall bill as early as Thursday, but lawmakers were still haggling over several unrelated amendments Wednesday evening.

7 Comments

1. johnd said at 10:20 am on Thursday October 29, 2009:

   You could argue that this will continue to distort the market and won’t really stimulate additional sales. Will $6500 really make or break the sale of a property?  The data indicate that it will merely serve to artificially prop up sales prices of homes that would have sold anyway. Not to mention the fact that most of the beneficiaries are middle class. People that are in the most need of help - low wage workers, unemployed folks, etc. - don’t stand to benefit since they aren’t/can’t take out mortgages right now anyway. Look at the “cash for clunkers” program. A recent study showed that the marginal cost of each transaction (that would not have occurred without the credit) was $24,000.  You could argue that the credit keeps the economy from completely bottoming out, but there are probably much better ways to do it. Seems like an inefficient way to stir up economic activity in a sector where, like the automotive industry, prices are out of sync with reality due to the massive amounts of distortions created through externalities and policy interventions. Prices will fall a bit more once the credits are formally ended.

1. LookingtoBuy said at 10:54 am on Thursday October 29, 2009:

   Interesting analysis, john.

1. JimC said at 7:37 pm on Thursday October 29, 2009:

   john, this credit while it helps people to buy a house, isn’t about that part of it.  The credit is to drive real estate transactions, which will drive employment in construction, real estate, title companies, and all the support industries to stimulate and keep employment, some of which are middle class and some of which are lower wages jobs.  Another reason is to occupy those houses and keep them from being vacant and running down values and areas of the country which without this stimulus would become homes for crime and poverty.

1. johnd said at 11:58 am on Friday October 30, 2009:

   JimC: Good point, but what happens when the credit expires in April? Seems like we’re just delaying the inevitable. Look at the experience we had with cash for clunkers.  Transactions fell off significantly after the credit expired. Leads me to believe that there will be a new wave of short sales and foreclosures next spring/summer as prices fall to compensate for the loss of the $8K. But you’re right, maybe we can keep the RE industry moving until we see economic recovery with job growth. That said, I’ll take advantage of the credit if I find the right place. It’s not making or breaking my decision to buy, but I’ll take advantage of other people’s money to furnish the place or upgrade some fixtures. That’s one economic benefit.

1. Lauren said at 12:26 pm on Friday October 30, 2009:

   Not to mention the credit is *expensive* - $15 billion so far. I think there are more cost-effective ways to create jobs and provide stimulus.

1. Jeff Thomas said at 1:55 pm on Friday October 30, 2009:

   Very interesting view points on the credit. From what I have read, only about 350,000 additional homes were purchased because of the credit. Add to this the cost of the program is more than the actual credit received and it seems like the credit is more of a prop and expense than a useful ladder to dig the country out of the recession.

   Jeff Thomas
   http://www.lending-solutions.net

1. Concentrist said at 11:15 am on Saturday October 31, 2009:

   This program is full of fraud and is only creating an artifical floor.  IMHO, the credit will be more than offset once the credit program ends and the market is allowed to naturally find a bottom. Plus rental communities are offering various incentives including 2 months free which eventually lead to lower rents. I’m waiting.