Should the First Time Buyer Credit be Extended?

The National Association of Realtors estimates that an additional 350,000 people bought real estate this year because of the first time buyer credit.  Calculated Risk, in turn calculates that the cost of the $15.2B program was therefore $43,300 per additional house sold. That’s because 1.9 million people qualified for the credit.

What seems harder to gauge is what goes back into the economy.  I met with a buyer last week at their soon-to-be house and he said to the contractor, “when we close we’ll have the $8000 to spend on improvements.  We’re doing just what the government wants us to do with it.”

I’m sure there is a “for every dollar spent, $x goes back into the economy” but I can’t find it.  Clearly not all of it goes back into the economy: stuffing it in the mattress for example.

If the Credit is allowed to expire on December 1 (close by November 30th) time really is running out to have a cushion with closing.  It appears possible that it will be expanded.  Diana Olick reports on her CNBC blog:

…the first time home buyer tax credit, set to expire Nov. 30th. No question, sales of new construction have been juiced by the $8000 bonus, and without it, we could see a reverse in overall sales. This month’s home builder confidence survey from the National Association of Home Builders showed a drop in the index measuring sales expectations over the next six months.

There is a bill on Capitol Hill, introduced several months ago, that would extend the credit, expand it to $15,000 and make it for all home buyers, not just first timers. But while it was easy enough to get the credit lumped into the economic stimulus package, it may not be so easy to do it as a stand-alone bill. While some insiders tell me a small housing package is in the works, others give it a much smaller chance given how much pressure Congress and the Federal Reserve are under right now over the budget deficit.

The bi-partisan Home Ownership Moves the Economy (HOME) Act of 2009 (H.R. 2801) has been assigned to the House Ways and Means committee.

NAR and the real estate related associations are pushing hard for an extension and expansion of the Credit.   That makes sense (though it has added less than one home sale per licensed Realtor).  It certainly hasn’t hurt our industry in the short term.  Inventory has dropped but so have interest rates.  Holding interest rates low potentially is something that is available to all home owners and buyers but does not stimulate the economy with cash in hand.

A $300,000 loan at 7% for 30 years is $1995.50 per month (PI).  At 6% it drops to $1798.65 ($196.85 per month).  Over 30 years, that’s $70,866.  $8000 is recovered in 41 months (using a small loan amount will of course extend the recovery time).  Under the rules of the First Time Buyer Credit, you have to stay in your home 36 months.  I don’t necessarily subscribe to the theory that the sky will fall if the Credit expires.  It would be interesting to see it expanded to a broader buyer or help the entire inventory, not just a portion of it.  The middle of our market segment from $500k to $700k is at a near standstill.  If we can’t free it, it will continue to exert downward pressure on the entire Portland housing market.

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