11/05/2009

Home Buyer Tax Credit

The current $8,000 tax credit for first-time home buyers will lapse at the end of this month. As of today the senate and house have opted to extend the credit through the middle of next year. Many feel that this is a great idea. In fact, it has been suggested that the tax credit has taken real estate values out of a tailspin. The current tax credit has been beneficial. However, I feel that the government should allow the credit to expire and encourage the real estate cycle to prevail again. It is well known that home prices are cyclical. This cycle is what creates wealth and profits in the market. These profits are what drive the market and create interest.

The tax credit will quickly create a bubble that will lead to another down-turn. Recent months are evidence of the potential bubble. Home prices have ticked upward in many areas with the tax credit deadline looming. This has created an artificial spike in demand that can only continue as long as home buyers are supplemented by the government. Extending the credit will only exaggerate the bubble and delay the inevitable decline.

I know that the tax credit is small and wouldn't seem to drive the industry but I think that it does just that. People that were considering a home purchase in the next year or two are forced to do so now because it is financially responsible to take advantage of the government stimulus. Government stimulus packages are designed to spark a recovery and should not be continued to the point of market reliance.

The original tax credit was intended to help people get into homes that they otherwise would not be able to. Real estate agents are already arguing that the end of the tax credit will kill business. Therein lies the problem. If the President does sign the bill into law, as he is expected to, it will further exaggerate the real estate industry's reliance on the tax credit. This will create a bubble that will burst sending values downward again.

Please reference the book for more information on demand and government intervention.
Also reference the articles below for more information.

http://news.yahoo.com/s/ap/us_homebuyers_tax_credit

http://www.walletpop.com/blog/2009/11/05/why-the-home-buyer-tax-credit-should-be-allowed-to-expire/

7 comments:

Lucas said...

This credit, in my opinion, is very similar to that of cash for clunkers. Cash for clunkers did the same thing with cars as this tax credit is with the real estate market. It created a false demand and the outcome was not truly what was wanted from the credit. I agree that the credit should have been allowed to expire and then let the market react how it is going to react.

Michael said...

In my opinion, the idea of tax credit to the first time home buyer is not good. I think it created the false demand for houses. When the demand for housing is weak and there is a huge supply of housing in a market, then market power switch to the buyer side. In current housing market, buyer can get house at lower price but he does not have enough income to buy house. So I think this issue is related to the income and unemployment. As average income rise, the total demand for housing increase and people are going to buy new home without any tax credit. I think we do not need the tax credit for the first time home buyer.

Blake said...

The tax credit for first time home buyers is government intervention in the market and will distort the market place. Government officials would justify this distortion with the positive externalities of getting more homes off the market and more people into homes sooner than they could do on their own.

Devin said...

The tax credit for first time home buyers did what it was intended to do. It help to stabilize the housing market and in turn stabilize the economy as a whole. With many signs that the economy is recovering the renewal of the credit was not needed at the same level as the original tax credit. The credit should be tapered back or allowed to expired altogether.

Dr. Tufte said...

-1 on Michael for grammatical errors.

I have to agree with everyone here. This credit was a bad idea to begin with, and should be killed as soon as possible.

The idea that encouraging people to buy something that they couldn't otherwise afford is bizarre on the face of it.

Fred George said...

I do not feel that the tax credit has made homes for sale a great deal more affordable to the purchaser. It is just an incentive and without it the real estate market would still survive. It is merely a tool to stimulate the housing economy more quickly than self recovery. I do not think that an extension of the federal tax credit will stop a secondary economic bubble from bursting in this industry.

chase said...

Personally, I think that the $8000 tax credit is a great idea and incentive to first time buyers. In the long run it makes it feasible for these people to buy a home. I understand that it makes a false demand for real estate but at the same time it's something that the economy needs to pick itself up. Therefore, this not only sparks the home buyers market but in turn will spark other industry markets.