The first-time homebuyer tax credit that was introduced as part of the American Recovery and Reinvestment Act of 2009 authorizes a tax credit of up to $8,000 for qualified new purchasers buying a principal residence on or after Jan. 1 and before Dec. 1, 2009.
Designed to spur consumer spending and reignite residential mortgage lending activity, the tax credit has fallen a bit short of industry expectations.
Yes, the Department of Commerce reported in late July that new-home sales had increased again in June — by 11% — from the previous month, which was the third consecutive monthly rise. Many mortgage professionals speculated that this was evidence enough of a recovery, but other supporting factors signifying an end to the recession have yet to materialize.
One such factor is home prices, which is a significant issue affecting Americans. The national median home price fell 16% in the second quarter from a year earlier, to $174,100.
Home values are depressed and will more than likely continue to depreciate because of the persistent oversupply of housing. Surplus housing can be attributed to two factors: too much development in recent years by home builders who were anticipating continual strong demand (which of course waned when the mortgage crisis hit) and foreclosures that added to the stock of vacant single-family homes.
This issue of home value is pressing because it affects every U.S. homeowner.
An article from the May 2009 Journal of Real Estate Finance and Economics, "Spillover Effects of Foreclosures on Neighborhood Property Values," reported that the spillover effect of a foreclosed home on surrounding properties is significant within a radius of about 10 blocks from the property in question and for up to five years from liquidation.
The most severe impact is an 8.7% discount on neighborhood property values, which then can gradually drop to between minus-1.2% to minus-1.7% for foreclosures liquidated within the past five years.
For this reason, it is incumbent on all of us to get excess housing inventories off the market, and the first-time homebuyer tax credit is one way to make that happen — potentially. Giving first-time homebuyers a tax credit lets them overcome some of the biggest challenges to homeownership — a down payment, closing costs and escrow, which combined can typically be up to 10% of the home's sale price.
The tax credit as is:
- Creates home price appreciation by removing excess inventory. Naturally, eliminating the surplus of homes will contribute to stabilizing home prices.
- Sparks consumer spending. A Dec. 4, 2008, study of homebuyer spending patterns reported that during the first year after closing, buyers of new homes tend to spend more than $12,000 on home-related goods and services and that buyers of existing homes spend almost $9,000.
- Generates sales tax. Spending on appliances, landscaping and home decor helps produce revenue for struggling retail shops but also sales taxes that contribute to state budgeting.
- Brings in real estate taxes. Reducing the number of vacated homes and increasing the rate of homeownership yields more property taxes paid to municipalities and states, again benefiting the local economy.
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Though these benefits are a good start, the first-time homebuyer tax credit unfortunately is not enough to truly stimulate homebuying. Currently it is rather difficult for people even to gain access to the funds because they are available only through a network of state housing agencies.
Also, the tax credit often cannot be monetized until yearend tax filings. Consumers could actually benefit more from having those funds available at the closing table to help offset some of the up-front expenses.
Another area in which the tax credit is limited in its overall effectiveness is its limitation to first-time homebuyers. An entire population exists of potential homebuyers who have owned before but are not buying now for a variety of reasons.
Perhaps extending a tax credit to responsible, knowledgeable borrowers — who do not have a history of delinquency or bankruptcy but are reluctant to become buyers due to concerns about price depreciation or a difficult credit approval process — could be just the motivating factor to bounce the real estate market. There is a great stimulative opportunity here.
In deciding to extend and expand the first-time homebuyer tax credit, policymakers must consider more widely the bigger picture of homeownership and its enormously positive effects on the economy. Only this will lead to a comprehensive healing of America's real estate system.
