Friday, November 6, 2009

Tax Credit Extended (with some enhancements)

The first time home buyer tax credit that was set to expire at the end of this month has been extended through April 30, 2010. Both the House & Senate have passed the legislation which is expected to be signed by President Obama very soon. Let's discuss what the extension does, then we can talk about whether or not it is a good thing.

Like the previous tax credit, this extension offers up to $8000 in the form of a tax credit to first time home buyers. It extends the credit through April 30 of next year. In order to be eligible, buyers must have an executed contract by April 30, and then close on the transaction within 60 days of the April 30 deadline. Here are some enhancements to the new plan:
  • Income limits raised to $125,000 for single buyers and $225,000 for married couples
  • Up to $6500 tax credit for "move-up" buyers that are not first time homeowners
  • Extends tax credit through April 30, 2010
For those that will take advantage of the program and those that work in the housing market (like me) this is a great program. It will provide stimulus to the housing market as first time home buyers have greater financial incentive to purchase their first home. Despite the housing meltdown, I believe getting families into their first home is still a good and noble deed.

Move-up buyers may have a more difficult time taking advantage of the program since they will typically have to sell another home in order to qualify. The $6500 tax credit will provide some financial incentive for them, but it hardly seems to be enough in markets that have seen steep devaluation like Arizona, Nevada, California, & Florida.

Some will argue that the tax credits are just another "Cash for Clunkers" type program that will provide only temporary relief, then cause another decline in sales when the program is ended. That's probably true. Any government rebate or incentive has some affect in affronting the free market process.

The government cannot continue to extend the program in perpetuity. It must end sometime as they will eventually need to collect tax revenue to pay for dramatic increases in spending. Can the government continue these tax credits until the housing market has rebounded? How will we know when the market has rebounded? What is our definition of rebound? Sorry for all the questions, but there should be some definition if the plan is to continue these incentives until there is a rebound. Prices going back to 2005 levels should definitely NOT be the definition. If the definition is to be based on the number of sales taking place, then we have already rebounded. But that shouldn't be the definition either since a large portion of current sales are investors (another issue I will write about soon). Perhaps owner occupied sales should be the definition of the rebound.

At some point we have to stop the tax credit. I am glad that it has been extended for several more months, but we need to be ready to move on when it eventually ends.

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