MAYRA'S COMENTARY ON THE FINANCIAL CRISIS...Continued
After home sale prices reached a peak high between 2001 and 2007, the housing market collapsed in 2007. In an effort to rejuvenate the market, Homebuyer Tax Credit Programs were implemented in 2008. While a credit is always a benefit and it may even stimulate spending as it puts more dollars in the hands of qualifying tax payers, I do not think this program targeted the most affected parties. As a result, the program did a poor job of reviving home sales and creating any real lasting effect.
The collapse of the housing market was actually a market “correction.” There seems to be consensus that real estate assets are now accurately valued, which means it’s a good time for people to enter the market and purchase a home. If that is the case, which I believe it is, then why does a first-time homebuyer need an $8,000 tax credit? Since 2008 any first-time homebuyer would be purchasing an asset that is properly valued so a credit is giving them a discount rather than assisting the seller that is more than likely taking a loss. The tax credit did spark activity by motivating first-time buyers to engage in a market where confidence levels were low. This group of buyers also had the capability to pull the trigger on a purchase since they did not own property that needed to be sold first. I understand those reasons; however I would argue that of all the Americans hit so hard by the state of the housing market, the first-time buyer is at the bottom of the list. While the First-Time Homebuyer Tax Credit temporarily increased the number of homes purchased, it did not get us any closer to stabilizing the housing market in the long term. There are still millions of property owners sitting on devalued assets that have foreclosed or are on their way to foreclosure.
People who purchased homes during the peak years referenced above overpaid significantly as home prices were artificially inflated. However, if those same people also sold a home during that time, then the gain on the sale of home #1 was used to overpay for home #2. Yes, that person will take a loss in the current market if he or she decides to sell now, but they received a large gain as a result of the overvaluation in the year they sold home #1. So, in my opinion, the Repeat Homebuyer Tax Credit was another miss. The $6,500 credit may have temporarily increased the number of homes purchased, but it still did not target the exact group that is hurting or provide any lasting results.
Now think about the person like me that bought their first home during the height of the market. I overpaid for a property in 2005. A gain from the sale of another home did not give me the capital to purchase my home – my savings did. I am looking at a loss in the neighborhood of $75,000. I have to sell this property and take that loss in order to buy my next property. I am no longer a first-time homebuyer, so I do not qualify for that credit. And, the $6,500 Repeat Homebuyer Credit is simply not enough. If I face a loss of $75,000 and have to come to the closing table with that cash, what are the chances that I will also have the down payment needed for the purchase of my next home? And, if I do, does a credit of $6,500 really help? Please, it’s a drop in the bucket.
So, my Congressmen, noodle through it, as my husband would say. Think about and research the market conditions before implementing policies and wondering why they aren’t having the impact you anticipated. If you’re going to meddle, forget about incentivizing the broad and large groups of “first-time homebuyers” or “repeat homebuyers” and directly target those that were hit the hardest: first-time homebuyers between 2001 and 2007. Extend the Repeat Homebuyer Tax Credit and base the credit on market conditions and median home prices in each zip code across the country. If first-time homebuyers between 2001 and 2007 receive a larger credit to assist with the down payment of a new home and offset losses on the sale of their existing property, there might be real movement of housing inventory as those buyers would be freed of their overvalued obligations.
Mayra Bacik CFO