Who doesn't like free money? But will the new home buyer tax-credit program help the real estate market? (Photo: iStockphoto)
President Barack Obama, as expected, signed a bill today that includes a home buyer tax credit that will give up to $8,000 to first-time buyers and up $6,500 to buyers who have owned their home for at least five years.
This bill will take over for the first-time buyers tax credit program that will expire after Nov. 30. The new program also expands the pool of eligible consumers with income limits raised to $225,000 for couples and $125,000 for individuals.
The one aspect of this program that everyone can agree on is that this is a positive for buyers. Hey, who’s going to turn down free money?
But after that, it’s up in the air if the tax credit significantly spurs home buying or just gets people to purchase a home sooner. NAR claims that the first-time home buyers credit contributed to at least 350,000 home sales. A more conservative estimate has come in at about half that.
The politicians certainly were behind this bill. More likely, the politicos were more afraid “not” to vote for it than any backlash they may get from their constituents.
In reality, this is another tactic in the psychological war on the recession. The tax credit is no different that the stimulus checks we all got last year under George W. Bush or the recent Cash for Clunkers program from the Obama Administration. Both are designed to push people to action — spend —by offering a short-term benefit — money with which to spend.
You can look at charts and graphs until your eyes glaze over trying to predict where the economy is going. But history says the best way to get through a recession is to spend your way out.
To spend, consumers and business have to be confident that they’re not the only one opening the checkbook. So, we wait around for somebody else to do it. When enough businesses start hiring or consumers begin spending, the more of those on the sideline jump in. Pretty soon, everyone’s feeling good.
It’s kind of like a couple years ago when houses were appreciating so fast that we talked ourselves into thinking it could go on forever. OK, maybe that’s a cheap shot, but the psychology is basically the same.
Now, putting money in the hands of people and business isn’t a bad thing. The Republicans did it by handing out cash, although they would much rather cut taxes. Of course, those are a lot harder to reverse than one-time payments.
Unfortunately, if you just give people money, there’s no guarantee what they’ll do with it. They may pay off debt, which doesn’t really spur the economy. Or, heaven help us, they put the money in the bank.
The Obama administration has preferred a different tactic – “I’ll give you something if you do what I want.”
So whether it’s Cars for Clunkers or Casa’s for Cash, the goal is the same — get people spending money. The clunkers deal worked pretty well while it was going. After the program was over, the dealers found they had gone through their pool of future buyers.
The real estate industry will see something similar. The fact is, only so many people have the means and the will to buy a home. So unless people start making more money or get a good vibe about their financial future, not a lot is going to change.
Nearly all of the buyers are first-timers and investors, and they are competing for the same entry-level properties. The move-up market is dead because few want to sell their home at the bottom, leaving the foreclosed and the desperate contributing inventory.
The one thing this tax credit has over Cash for Clunkers is that once you’ve bought a car, there’s not a whole lot else you need. It’s different with a house. It’s proven that those who buy a home will likely spend more money after the purchase. Hiring contractors, buying materials or purchasing appliances spreads money to more sectors of the economy than just buying a car.
Unfortunately for me, I drive hybrids so the clunker thing didn’t work. Living in Southern California, $6,500 won’t likely even cover my closing costs. No, I’m staying on the sidelines, paying down debt and waiting for the next stimulus program.
Personally, I’m voting for the Green for a Getaway program.
Now that’s something I could really use. —Rick Hazeltine