Laurence Yun, the Chief Economist for the National Association of Realtors (NAR), raised the following points (among others) yesterday in his Daily forecast. His comments are in defense of extending the First Time Home buyer Tax credit. Here's some of what he stated:
- "Home buyers will naturally become hesitant to buy if they view (rightly or wrongly) that home values will continue to fall. That buyer hesitancy can lead to self-fulfilling prophesy of rising inventory and falling home values. Falling home values will in turn push the economy back into recession. Consumer spending will be weaker as homeowners continue to experience destruction in housing wealth. Bank balance sheet will turn for the worse and possibly lead to another round of severe credit crunch."
- "To offset that pessimism the stimulus money needs to be put on the table for home buyers. As more buyers enter, inventory will be trimmed and home values will stabilize. From that point onward, no further stimulus will be needed. But we are not there yet."
- "The home buyer tax credit extension could cost the government about $10 billion more or less depending upon how long it is extended. That is a rather reasonable sum to stimulate the economy compared to the $700 billion in TARP funds that went to Wall Street and the $787 billion broader economic stimulus bill that was passed early in the year. The tax credit benefits main street consumers. Homeowners indirectly benefit as well, as housing equity no longer gets destroyed."
- "The resulting economic growth and job creation will automatically lead to a rise in federal tax revenue, thereby easily covering the cost of tax credit. The upcoming GDP forecast could easily get raised to 4% to 5% if the tax credit is extended."
I don't disagree with any of Mr. Yun's points. So why am I apposed to extending the tax rebate? The program has been a fabulous success during a very difficult economic period. It's the source of the money that concerns me, the fact that it's viewed as a tax credit. Additionally I don't like the fact that it only benefits a small portion of the public, first time home buyers. Isn't it just as important to aid people buying their second or third homes? People who have growing families, or down-sizing or relocating.
Here's an alternative approach for your consideration:
I feel that the plan should not be a tax credit at all; but instead should be a stimulus that comes directly out of the seller's proceeds from the sale of their home. Currently a seller is allowed to pay certain closing costs (in an amount not to exceed 3% of the sell price-could be as high as 6% for FHA) at close of escrow. Why not extend this percentage to allow the seller to include up to 2% additional monies with a cap at $10,000.00 (this maximum amount equates to the first $500,000 of home value). In other words 5% of the sales proceeds could be used for buyer closing costs and down payment- with the down payment portion fixed- not to exceed 2% of the sales price- with a maximum of $10,000. Just as with closing costs, there should be no gift taxes associated with this transaction. Additionally the first time home buyer restriction should be removed from the program. If we want a stimulus for sales across the board, why not make it available for anyone buying a home?
This is a better solution for the following reasons.
- There would be no need to wait for your tax return (or a bridge loan), so you could use the money at closing.
- The program would be voluntary for the seller and it would be up to the buyer to negotiate it into their offer.
- It aids both parties equally. It's both a tool to help the seller sell their home and the buyer to qualify to buy.
- An FHA loan requires at least 3% down thus the 2% does not cover 100% of closing costs. Buyers would still have to come up with at least 1% out of pocket. So the buyer would still have some skin-in-the-game.
- Sales would be stimulated on a very local basis and would be self-regulating. If homes in a neighborhood are "selling-like-hotcakes" then there would be no reason for a seller to offer any monies back at closing.
- Home values would not be pumped up, since they would still have to be appraised for the total sell price including any monies back from the seller. It would all be properly accounted for on the closing statement.
- The result of this approach would be greater price stability. Buyers seeking money back at closing are much less likely to want to low-ball an offer.
So, these are my thoughts on the issue, what do you think?
Mack
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