Should the First Time Homebuyers Tax Credit be Expanded and Extended?
The $8000 first time homebuyer's tax credit is set to expire on November 30th. This means that those who want to take advantage of this refundable credit have only a couple months left to close on their home purchases. Since it could take 30 to 60 days to close on a home, the deals must be made soon. Now there are talks in Congress and the administration about expanding and extending this tax credit. Here are some arguments both for and against this decision.
Arguments for extending the tax credit
Increased home sales
Real estate industry groups argue that this tax credit is largely responsible for the increase in home sales this year. The National Association of Realtors estimates that this program will result in an extra 350,000 sales. The builders and realtors argue that the expiration of this tax credit will hurt the nascent recovery of the housing market.
Stimulates other parts of the economy
When consumers buy homes, they also buy a lot of other goods and services with it. For example, most people would spend some money on furniture and home improvements after they buy a new home. Those who are arguing for the extension say that the tax credit encourages new homeowners to spend more elsewhere, and that provides jobs.
Arguments against extending the tax credit
Cost of the program
Many first time homebuyers who bought homes this year would have bought homes regardless of the tax credit. This means that the cost to the government to generate each new sale is much more than $8000. If you take the current estimated cost of $15 billion and divide it by the NAR's estimate of 350,000 extra sales then each extra sale cost about $43,000. Additionally, the $15 billion cost is already double of what was budgeted in the original stimulus bill. If this credit were extended it is unknown how much it would cost.
Higher home prices
There have been many anecdotal stories of bidding wars by first time homebuyers who are rushing into closing on their purchases. Some of them are bidding much more than the listing because they feel that the credit discounts the price. This credit could end up being a worse deal for buyers if they had to pay much more than the price they would have had if the credit did not exist.
Just like the Cash for Clunkers program, this credit could have pushed up the purchase decisions of a lot of first time homebuyers. This means that there will be less potential buyers in the near future.
As I wrote earlier, this credit can be used as a downpayment in the FHA program. This is essentially a government sponsored 0% down loan. This makes sense for some people, but it could also cause more foreclosures since those who have no equity in their homes are more likely to default on their loans.
Currently, there are several different proposals to extend or expand the credit. One proposal is to just extend the deadline of the current scheme by six months, and another proposal would expand the credit to $15,000 and open it up to all homebuyers until the end of 2010. Needless to say, the real estate industry groups are arguing for the extension of the credit, but personally I think real estate would be cheaper for the consumer without this credit. By looking into the government's past record of extending Cash for Clunkers and other bailouts I am guessing that there is a good chance that they would expand this credit regardless of the costs.
What do you think? Are you looking forward to an extension of this credit? Why or why not?
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