subject: Does the Federal Housing Credit work? [print this page] By now, in 2010, most Americans are likely tired of hearing about the housing crisis that has plagued the country for the past 3 years. It's important to understand how we got here in the first place if we want an opportunity to correct it. Perhaps the market was just overinflated? Doesn't capitalism follow the principles of "Economic Darwinism", in that the fittest businesses will survive, while the ones that cannot turn a profit fold? If that's the case, why do we need government intervention in the first place? There is speculation that many of the mortgages that were written during the housing boom were done haphazardly; homeowners did not understand the terms of their agreement if an adjustable rate was used, or, they should not have been qualified for the loan to begin with. As a result, many of these mortgages, especially those considered sub-prime mortgages, were almost destined to fail. The major crisis was averted, but we are still mired in recession as the housing market has not recovered. In fact, we may not have bottomed out just yet. In 2009 alone, there were 2.8 million more foreclosures in America. Thats approximately 1 in every 45 houses, and represents a 21% increase from 2008. The Solution? In February 2009, the Federal Housing Tax Credit was passed. The housing credit gives first time home buyers a 10% credit on the purchase price of their home, capped at $8,000. The average cost of a home in the U.S. is approximately $175,000 based on recent trends, so it is very likely that the vast majority of first time home buyers would receive the full $8,000 credit. The credit was initially to be granted from February 2009 to December 31, 2009, however, it has since been extended into 2010. The goal of the housing tax credit is to create demand by getting first time buyers into houses. The desired outcome would be to stabilize the housing market, stimulate buying, get rid of excess inventory, free up credit availability, and eventually encourage building homes again. Whats the problem? There are a few concerns with the tax credit that should be addressed. To start, as of January 2010, the housing market has all but stabilized. In fact, average home prices were down across the US to end 2009 compared to the average six months earlier. In June, the average home price was approximately $180,000 - $185,000. At the end of 2009, the average price was $170,000 to $175,000. This suggests that any purchase activity during the tax credit period has not increased the values of our homes. There is a possible trend that may have contributed to this reduction in value. Many of the individuals purchasing a home who are not or were not first time home buyers, have demanded the same reduction in cost that they would get from the tax credit, from the seller. In this market, with more supply and less demand, the buyer has the leverage. In several instances, the homeowners agree to reduce their price by $8,000 to accommodate the buyer. Now, perhaps this has only occurred in a few isolated places, or perhaps it is more pervasive than we think. Either way, if a seller reduces a $175,000 home by $8,000 to accommodate a buyer who does not get the tax credit; that is a 4.5% decrease in value. Spread across the nation, that is a significant number. Secondly, one of the major ingredients in our housing crisis was the fact that buyers should not have been given mortgages in the first place because they could not afford them. Can all of these first time buyers afford these mortgages? What percentage of the first time buyers will default? Lastly, a recent poll created to measure the effectiveness of the housing credit suggests that only 400,000 of 2 million homeowners who have received the credit between February and December 2009 actually purchased a home because of the tax credit. The remaining homeowners are said to have purchased a home regardless of the credit. That said, if $8,000 was given per credit, of the $1.6 trillion given out in tax credits, only $320 million actually created demand for purchase. The other $1.26 trillion might be considered wasteful. The true effect remains to be seen, but as of right now it is my belief that the housing tax credit has not had a positive impact on the economy.
