Homeownership as a moral right has been the great unspoken reason for the nation’s financial collapse of the past year and a half. And unfortunately Congress and successive administrations appear all too willing to recreate the very conditions that led to the disaster. President Obama today signed a $24 billion economic stimulus bill one of whose main features is an extension and expansion of a “temporary” first-time homebuyer tax credit worth up to $8,000 per household. The House and Senate each passed the measure earlier this week by the respective margins of 403-12 and 98-0. In so doing, lawmakers laid the groundwork for even more inefficiency and corruption.
The first-time homebuyer tax credit program amounts to a housing industry equivalent of the auto industry’s “Cash for Clunkers” program. Created last summer at the urging of the Bush administration, the program was expanded this February as part of the Obama administration’s economic stimulus plan. An eligible household now could receive a credit of up to $8,000 after closing on a home purchase. And whereas the original program required recipient households to pay back the money over 15 years in equal installments (on homes bought between April 8, 2008 and January 1, 2009), the revised Obama program has transformed it into a giveaway – and then some. Not only is there no requirement to repay, but “first-time” homebuyers can refer to buyers who haven’t owned a home within the previous three years. And given that the home price limit is now a whopping $800,000, it’s clear the intent of the program is to shift as much investment as possible into the housing sector. That aim, fueled by an obsession with raising homeownership rates for blacks and Hispanics, is what drove the massive and ultimately unsustainable securitization of residential mortgages in the first place.
The tax credit is of dubious necessity. According to a Brookings Institution analysis, some 85 percent of its users would have bought a home anyway. Yet the program also has been subject to substantial abuse. IRS Inspector General J. Russell George two weeks ago testified before a House Ways and Means subcommittee that nearly 20,000 applicants claimed a combined $139 million on their 2008 tax returns before, rather than after, purchase. Moreover, he said, some 74,000 buyers already had owned a home within the past three years. What’s more, hundreds of homebuyers were minors, some even preschoolers. Worst of all, from a public accountability standpoint, at least 53 IRS employees filed “illegal or inappropriate” claims.
In the face such experience, one would think Congress would seek to allow the program to end. But lawmakers responded the opposite way. Not only did they extend the program, they expanded it as well. The tax credit would extend to home purchases made prior to next April 30. And it also would cover a lot more potential buyers, raising income eligibility limits from the already absurdly high $75,000 and $150,000 for singles and married couples, respectively, to $125,000 and $225,000. Even more absurdly, this “first-time” homebuyer credit would include a separate credit worth up to $6,500 for homebuyers who owned their previous residence for at least five consecutive years over the previous eight years. A Goldman Sachs report released Tuesday concluded this latter provision won’t reduce excess housing inventory because “every buyer taking advantage of the move-up credit would necessarily be a seller.” The analysis added that the provision may inflate home prices by 1 percent because “sellers are likely to incorporate a fraction of the credit amount in their sale prices.”
Lawmakers, who tacked on the homebuyer tax credit extension/expansion onto a bill creating emergency unemployment benefits and employer tax refunds, remain confident they’re doing the sensible thing. “The homebuyers’ credit has helped pave the way for stabilization in the housing market and contributed to three consecutive months of rising home prices,” says Rep. Jim McDermott, D-Wash. “Its extension will continue to make homeownership more affordable and bring confidence to a housing market and economy that remain fragile.” But even in the halls of Congress, some see the program as an expensive giveaway. Sen. Christopher “Kit” Bond, R-Mo., explained it this way: “For the vast majority of cases, the homebuyer tax credit amounted to a free gift since it did not affect their decision to purchase a home. And for the small minority of buyers whose decision was directly caused by the credit, this raises the question of whether we are subsidizing buyers who may not have been able to afford buying a home in the first place.” If only such common sense were reflected in the House and Senate votes.
One hopes this new lease on life will be the program’s last. But don’t count on it. One of the Senate bill’s prime sponsors, Sen. Johnny Isakson, R-Ga., a former real estate executive, asserts, “This is probably the last extension.” Note the word “probably” – one would have to be naïve to believe that if the economy doesn’t fully turn around by next spring, Isakson and his colleagues won’t consider another extension. Certain IRS employees, among other persons, are counting on it.