High end likely out of luck with tax credit extension

"Why not just take income limits off the tax credit altogether?"

Because if you can afford to even THINK about buying a $1M home, you dont need a taxpayer subsidy of $8k to make you buy.

> Why not just take income limits off the tax credit altogether?

Why not eliminate the tax credit altogether? The government should not subsidize the purchase at homes whatsoever... There is no social utility in it. Having tax credits for jumbo mortgage homes and people with high incomes? That is doubly bad, since it is socialism for the rich. Let housing go to where it would go on its own. If you can buy a home at market rates with a market rate mortgage? Great for you! If you can't? Renting is just as good. There is no moral superiority of either situation. It should only depend on your finances, your personal situation, and your own desires. Propping up the market is expensive and screws the average American (especially those too young to vote against it!) in the long run.

I really don't think $6500 credit (as being proposed for step-up buyers) is going to make an impact on the choice to buy a $1m+ home. Congress has to weigh the cost of expanding vs the impact to the market. I see no impact coming from following this suggestion. As you said, the problem is in the jumbo mortgage market. Getting capital flowing there again is the only way to stimulate the high-priced market.

"Still, the downpayment requirements are pretty stiff now – you need to cool $400,000 to $500,000 now in the bank to come up with 20 percent or 25 percent for a $2 million home."

I don't see 8k helping the jumbo market all that much. It is just a drop in the bucket compared to the down payment numbers in your example. Furthermore, if someone is making over 150k a year as an individual, an $8k gift might cover one jumbo mortgage payment. Is that going to nudge seomone to move now in an uncertain market?

the subsidy for everyone idea just blows my mind. Everyone in Massachusetts seems to think that govt money comes out of thin air. It actually comes from taxes. Middle class taxes - if you look at the wealthy, there are not enough of them to fund things, so the US has to raise money on the middle class.

So the subsidy is basically taking money out of your left pocket and loaning it to your right pocket. The bill will come due.

Taxpayers ate a $2B hit on the CIT bankruptcy filing; nice work Maobama. Imagine how much loss the Knifecatcher Enhancement Program will create for the taxpayer as values continue to drop. This has to be one of the most egregious examples of buying votes in history. Housing needs to be left alone and Maobama need to be shown the door. I can't believe my tax dollars are being wasted like this....

Even with the extension, the tax credit IS going away in a few months. It will not be extended again. The tax credit didn't influence my decision to buy a home, but I will be putting money back into the economy once I get it. And that is the whole point of the credit, is to stimulate the economy. And no, my home didn't cost $8,000 more because of it. In fact, I'm getting a pretty sweet deal.

But having a multi-million dollar home, 5 luxury cars, and a trophy wife is the American Dream! And we don't want to deny anyone the American Dream, do we?

If the point of the credit was to be fair to everyone, everyone would get the credit, regardless of income or whether they were buying a house. (High earners would still get the short end of the stick, since they'd get stuck with higher tax bills down the line, but I digress...) But that's not the point of the credit. The point of the credit is to increase homebuying, and the income limits are the only thing left in this bill that make the credit even remotely targeted.

The one possible argument I could see in extending the credit to everyone is that some people above the income limits, who would otherwise be buying right now, are waiting for the tax credit to expire, so they don't have to bid against people who are getting a better deal than they're getting. But most of the people who think this way probably also think that the market will decline by nearly $8k when the credit expires, so giving them the credit won't necessarily induce them to buy today.

Still, the downpayment requirements are pretty stiff now – you need to cool $400,000 to $500,000 now in the bank to come up with 20 percent or 25 percent for a $2 million home.

I am very familiar with the Weston and Wellesley residential markets and both are getting crushed right now. As I have said repeatedly, prices in these areas will continue to fall until either they reach levels supported by fundamentals or the government implements meaningful price supports.

Back in 2003-2005, it was not at all unusual to see somebody with a $200k income borrowing $1,400,000 or more (7:1 DTI) with very little down. Now that number is more like $800,000 (4:1 DTI) and is offered only in conjunction with a 25% or higher down payment. This massive reduction in buying power is having a predictable effect on prices.

The simple fact is, most of the "creative" financing instruments we saw in the early part of this decade which enabled buyers to stretch into the high end (low-doc, no-doc, Alt-A, 0% down, option-ARM, etc.) were doomed to fail from the start. To the surprise of pretty much no one in the industry who dealt with these things on a day to day basis (myself included), many of these loans are already in default or are headed there quickly. Yesterday's 'innovative financing" is today's "toxic asset", and lenders and private investors have learned their lesson. Don't expect jumbo lending to "come back" anytime soon. Absent government meddling, 20% down is the new normal.

At the peak, properties in Weston and Wellesley were priced at roughly double what fundamentals would suggest is reasonable. This fact should be absurdly obvious-- prices more than doubled in those towns from 1999 to 2005 with very little change in population, household incomes, or anything else except easy access to credit. But now that the credit bubble has popped, we will almost certainly see a 50% correction as prices unwind to pre-bubble levels. (This is actually an optimistic scenario since it assumes no overcorrection on the downside... the correction will likely be even more.) Look for 15-20% decreases this year (we're on track to hit at least 15% according to Warren Group) and further declines in 2010 and 2011.

A couple of unrelated thoughts on the income limits:

-I have a friend in Arizona who decided to buy a condo this year, in part because it was a good time to buy, in part because prices (and factors like price/rent and price/income ratios) had already come back down to historic norms, and in part because of the tax credit. When she bought, it looked like she'd be making $75k this year. Her business caught a couple of lucky breaks, and that number started creeping higher-- eventually, it looked like she'd make $85k. But her marginal city, state, and federal income tax rate was already 40%, and the income phase-out added another 40%, so of that extra $10k, she stood to pocket less than $2k. She decided that wasn't worth it, so now her plan is to stop doing income-generating work around thanksgiving (when she hits $75k for the year), and spend the month of december putting sweat equity into her condo and her business. Kind of a waste, and not exactly stimulating the economy.

-If an unmarried couple buys a house together, either one can claim the full credit, as long as he's under the income limit. So if a couple wants to buy a house, they're better off being unmarried. Doesn't exactly seem like a great public policy incentive.

Bee, how do you know your home didn't cost $8,000 more because of the credit? If there was no credit, chances are, all of the offers that the seller entertained would have been less, and you would have been in a substantially stronger negotiating position.

James, your friend can apply for the tax credit against her previous year's income (2008 AGI) in the case that her 2009 AGI will be too high.

We're going to play this game again?

The tax credit will be extended in March. Again. Trust me on this. They're not going to stand up and say, "look, we're going to make this credit permanent" because that doesn't cause the same effect. Congress is going to say, "This is temporary. We promise this time it will expire. Unlike the previous time we said it would expire and that temporary loan thing we did last year. Trust us. We're not going to cheat on you again!"

And next March, as the market is in the dismal seasonal downturn that is called "winter" that happens every single year (but the NAR economists will say they never saw coming); the Real Estate Industrial Complex is going to go throwing money at everyone in Congress screaming how if we could just restart the Ponzi scheme known as the Great Housing Bubble everyone would be happy.

Trust me. Congress may be corrupt but they're not dumb. So when Congress returns from recess in early 2010, to snow, slush, and dismal Real Estate numbers, 535 members of Congress are going to stand up, hold the hand of the NAR just like Bill held Hillary's hand, and promise us that just one more time the credit will be extended and you better buy a house before the credit expires and this time they mean it (and then say in a whisper: "or else we'll extend the credit again.")

Just like I promise to never vote for a politician that is supporting this tax credit.

Charles, the money will come from a tax, but it will be the hidden inflation tax. The US cannot possibly support its spending habits or ever hope to pay off our $55+ trillion debt through taxes, without a MASSIVE decrease in spending. This will never happen. So the "solution" is to print money out of thin air, and pay off our creditors (and ourselves) with depreciating dollars. So yes, it will be the lower and middle class who will be hit hardest, but it will be through (hyper)inflation not outright taxation.

Got gold?

If the goal of the tax credit is to boost demand (which it does so by stealing demand from the future), there is no reason to extend the credit to current homeowners. There is a net change of zero when a current homebuyer trades up. All they are doing is swapping one home for another. The only real demand is from the first time homebuyer.

It is interesting that the bearish types on this blog (of which I am one) are starting to reference two trends which I think are contradictory. The oft cited statistic that each sale costs the government 41K since 4 out of 5 buyers were going to buy anyway (a group that I am a part of) does not really jibe with the theory that the tax credit has caused current prices to rise 20K due to some sort of buying frenzy. Sellers who have first time home buyer type properties also have an incentive to sell within the window.
Obviously Scott’s proposal would be great for realtors as it would lower the barrier for them to close more deals, but it isn’t fair for governments to collect taxes from everyone or defer spending imbalances to future generations and then hand money to homebuyers. While the 8K probably does stimulate consumption on the part of the homebuyer, one of the whole reasons this prolonged recession occurred was that our percentage of GDP that is consumption is too high. The US economy is eventually going to have to export more goods to the emerging markets of the world in order to be competitive. The government’s tax strategy should be aimed in that direction if it ever wants to put a dent in unemployment. Plans that lead to even more consumption probably will only drag us further into the soup long term.

John, I've never been a gold bug, but I'm getting really scared of exactly what you say. Inflation is the easy solution for a short-sighted politician, which recent events shows we have on the left and the right.

Yes, inflation will trash the country (weimar republic, zimbabwe, anybody?). But in the mean time people who don't know the difference between a real and nominal dollar will be ecstatic that their "home" price is going up again.

Look at all the people on here who advocate highly inflationary approaches...

McDeuff:

Those two ideas are not contradictory at all. The $41k/house figure is based on the idea that 20% of the people claiming the credit otherwise wouldn't have bought a house. 20% isn't nothing. This means that there were 20%* more people that sold their house to first time home buyers than would have sold if the credit hadn't been in place. How much does the price level in the market have to change to induce a 20% increase in the number of people willing to sell their houses? I don't know the answer, but $20k sounds reasonable, and other data is pointing to something like a $20k bump in prices from the credit, so I see no problem with claiming that each extra sale costs $41k and the credit is propping up prices by $20k at the same time.

In short, a 20% bump in sales really is a buying frenzy.

*Actually, 25% more, since 100 is 25% more than 80.

"It is interesting that the bearish types on this blog (of which I am one) are starting to reference two trends which I think are contradictory. The oft cited statistic that each sale costs the government 41K since 4 out of 5 buyers were going to buy anyway (a group that I am a part of) does not really jibe with the theory that the tax credit has caused current prices to rise 20K due to some sort of buying frenzy. "

I've pondered this too on this blog. Here is my take, on this blog at least. Any and all evidence which fails to suggests a long, dramatic drop in prices with a concurrent collapse in our economy while simultaneously ridiculing our current or past leaders for their incompetence (maybe even insulting them by name, e.g. "Maobama") is soundly ignored or discredited.

I think this observation falls into that category... :)

From the ground, seems like prices are falling regardless of the credit. I suspect that we will find that the 8 k credit failed to prop up prices even during the credit period.

just curious, I'm a bit confused, are you saying the bears are right, or wrong?

I'd continue to put myself firmly in the bear camp of course. Though I'm no more a perma-bear than I was a perma-bull, and I expect I'll be a real estate bull again one day.

just_curious:

Some of the bears on this blog think the entire economy will keep going in the toilet, and job losses will drive prices down. To be fair, some of the bulls on this blog also think the entire economy will go in the toilet, and inflation will drive prices up.

But many of the bears on this blog are looking at the prevailing economic conditions (10% unemployment, relatively tight credit) and making predictions on the housing market in light of that. It's not that we want prices to fall, it's just that we think that a detached analysis indicates that prices will fall.

McDeuff: Where did you get the $20k figure? This is the first time I've heard that number cited. Other figures I have seen:

1) $43k cost per additional home sold (sources: BLS/NAR)
2) home prices are roughly 5% above where they otherwise would be without the tax credit (source: Goldman Sachs)

Needless to say, people should take these figures with a grain of salt considering the sources... And don't expect them to necessarily agree. They are estimates.

just curious, maybe the bears here refuse to acknowledge any positive "spin" because that has been the MO of the govt., media, and NAR for the last ten years. Government (the Fed specifically), the NAR and the housing in general have lost any semblance of credibility they might have had through this whole mess. "Maobama" is the perfect name for a leader who intends to take my hard-earned money, generated by being wise and prudent and giving it away to other people who have through their own greed and ignorance screwed up their own lives...

CHarles, James: I expect prices to keep falling...to a point. It will probably stabilize and turn around before we expect it.

However, I think bears take some perverse pleasure in watching this. They like to sit back smugly and discuss how stupid buyers are and how bad government policy is.

If this is The Great Depression 2.0, where are the breadlines? Where are the massive homeless? Where are all the people who've lost everything? Only 10 % unemployment...in a (great) depression??? Clearly the government (overall) did something right, though there are those here I suspect who would rather have a quick hard-landing with massive unemployment, stock market at 2000, families living in the street, etc. I prefer the soft-landing approach. The jury is out on all of these government programs no matter what people write. There are those who opposed the new deal.

I'm just saying that things may not be as bad as people like to say here...

Just_Curious,
I don't think this is The Great Depression 2, but unemployment rates are currently higher than they were 20 months into the Great Depression. There are many differences in the geopolitical system and safetynets now. There are some similarities between the two in terms of causation as well.
The govt. spending thus far appears to be purchasing votes. If you want jobs, you make capital available to small business, who will provide the jobs. You won't get the credit, but you'll create jobs. If you want votes, you fund giveaways, like public works projects.

""Maobama" is the perfect name for a leader who intends to take my hard-earned money, generated by being wise and prudent and giving it away to other people who have through their own greed and ignorance screwed up their own lives..."

I am fine with you calling him a socialist or even a communist if you choose. Please vote for the other guy next time if you please. However, Mao was responsible for the deaths of 10's of millions of people and the destruction of an entire culture. People are still enslaved and persecuted in the name of Mao. There is baggage in using that derogatory name, as much as if you called him "Hitler", and I suspect you use it to incite an angry responses from others.

"There are some similarities between the two in terms of causation as well."
"Similarities" should have been "Differences".