Is Congress Trying to Undermine a Real Estate Recovery?

Maybe it is just me but if I was a buyer in today's real estate market and I heard that Congress was trying to increase the $8,000 first time buyer tax credit to $15,000 and include all home buyers, I would seriously consider holding off on making a purchase.  Why you ask?  Well, there are many different reasons and they all stem from the uncertainty of what Congress will eventually do, if anything.  

Congress is notorious for floating out many different versions of a bill and then watering down one of them in order to get it passed by both the Senate and the House of Representatives and then get signed by the President.  This causes many great ideas and sound solutions to become ineffective and a waste of time.  

We don't have to look any further than the current $8,000 tax credit.  At one point it was a $15,000 credit that would have been available to all buyers.  But that bold, decisive bill that would have had a tremendously larger impact on home sales was weakened and become the current credit that has already had one major change and is set to expire on December 1st.  And there is no sign that the credit has done anything to improve the housing market.

So now they are considering either extending the current credit for another year, increasing the size to $15,000, adding a $3,000 credit for refinances and/or letting all home buyers get the credit.  And there is no indication of whether or not the new limits and credits will be retroactive and how far back they will go.  

The last credit was retroactive to Jan 1st when it was signed into law as part of the stimulus package in the middle of February.  How far back they make the next credit is anyones guess.  And that is the problem.  What if they pass the bill and don't make it retroactive?  What if the actually bill gets debated and changed and watered down again and doesn't get passed until the fall?  What then?

What should a prospective buyer do if they want the full $15,000 credit and want to be guaranteed they get it if in fact that is what Congress passes?  They have to wait and see.  That is the only way to guarantee you get the credit because no one knows what will happen.  The people that bought a home last year have to pay back their tax credit because they didn't wait.

Congress cannot make swift, decisive moves that will help the economy.  Congress doesn't do what is right, they do what will get them re-elected.  They need to answer to special interests, not constituents because special interests give them the money to get re-eleted.  Congress can't make hard decisions and instead they have partisan battles and pass bills with partial solutions that are ineffective.  

And this latest battle over the tax credit will showcase Congress at its finest, working to confuse the public, change the rules, cut some people out and create another finger pointing debacle.  Much like the TARP that didn't buy any toxic assets and a stimulus bill that doesn't stimulate.

I ask again, is Congress trying to undermine a real estate recovery?  I say yes.

UPDATE:  I will be at a function this Friday with Rep. Frank Wolf (R), the congressman for my district here in Northern Virginia.  I will try and corner him and ask him some pointed questions regarding the tax credit and efforts to help the housing recovery instead of continuing to create indecision in the minds of the public.

Comments

[Kenneth G. Smith II]

If someone can pay rent, that rent can be considered part of a mortgage payment. The government is providing $8,000 for first time buyers, so why can’t the government pay part of the payment and have the borrower repay the government in the future?? Here is an example of how it could work.

• Mr. and Mrs. ZZZZZ have a mortgage payment of $1,170 ($200,000 loan with 30 year payout at 5.75% interest).
• The ZZZZ’s lose their job and can only pay $470, so the government pays the difference of $700
• So the ZZZZ’s remain homeowners and work through their problem. It takes the ZZZZ’s 10 months to get back on their feet, the government paid out $7,000 and now the ZZZZ’s owe the government.
• But the government says okay, you can start paying us back in seven years and the payment will be over 10 years at an interest rate of 3%.

What the government has done is to provide assistance to the property owner (just like the bailout plans for the Financial Industry and Automotive Industry) and requires them to pay back the obligation starting in seven years. This is not a freebie, but short term assistance. Franklin Roosevelt called it Lend Lease.

This program is not perfect, but it can assist a lot of people who want to own homes. Most importantly, it is channeled directly to the property owner, not a large corporation that has other motives besides keeping the property owner solvent.
A significant benefit of this program is that payments to financial institutions will resume and cash flow will get back to normal levels, thus credit availability should improve.

There needs to be conditions such as confirming gross income via income tax statements; confirming employment and confirming current payroll. The only group of individuals who would be excluded are those who own more than one property (there should be no break to the investor who treated real estate as a business) and cases where mortgage fraud exists in the form of straw buyers and invalid sales (properties that sold more than three times within five years and the value change was greater than 150%).

This total assistance would be capped at $50,000 and could run for 24 to 36 months
In a given year up to $25,000 could be provided.
The government would be releasing the funds over 12 months, thus the federal outlay would be limited.
The total cost of $10 million loans receiving assistance would be $250 billion per year or $500 billion in total.
This is much cheaper than the TARP bailout and part of this can be funded with the current $70 billion in TARP repayments.
The greatest difficulty in implementing this program is processing and accounting. Loan Servicing companies would need to add staff (if one servicer can process 50 applications a week, 4,000 servicers would need to be hired, plus additional support staff) Wow, as many as 10,000 new jobs would be created. Add to this job creation the fact that several million homes do not go into foreclosure and more jobs are not lost due to desperate situations.

Yes it is possible and yes it can work.

The reason it can work is because real estate goes through cycles. If people are forced to sell at liquidation prices, everyone loses. Give property owners a chance to get back on their feet, get back to work and the whole economy starts to turn around.

As stated earlier, this is not perfect and many will complain about the injustice. But think about the injustice of the corporate bailouts, the injustice that first time home buyers get a break, the injustice that shareholders come before the individuals who created value in the companies by buying products. One can go on and on, or we can try.

We only fail if we do not try.

[Tony Arko]

Kenneth, You make a very compelling argument for creating an entirely new program to bail out homeowners that maxed out their credit limit by buying too much house at too high a price and left themselves no room for error.

All the while many others were smart enough not to over extend themselves and decided to rent instead and wait for the market to correct. These people need no bailouts, no additional taxpayer relief plans. They just need the banks to foreclose or the homeowners over their heads to move out and rent somewhere else.

There are hundreds of families ready to buy as soon as the market gets back to normal. But normal won't happen until the governments stops trying to fix the problems that they created.

I, for one, do not want to subsidize those who were irresponsible in the past. I believe my hard earned tax dollars would be better spent today fixing other problems or paying down national debt.

[John]

Tony
I agree that we need to pay down debt and have less government involvement. But, I do not agree that all of the people who are in distressed situations today over extended themselves. There are houndreds of thousands of hard working people who lost their job or had pay reduced because of this recession. It is my belief that we need to provide assistance, not a baliout.

What is proposed is assistance, not forgiveness. How many times in our lives have we stopped to help people? The mess that exists does not fully lie at the fault of the taxpayer.

And yes, taxpayer. We are talking about assisting taxpayers. Pork Barrel Projects and other waste should be eliminated, and subsides exist in many tax breaks, included $8,000 for new home buyers.

Taxes should be equitable, but they are not and buy offering assistance we are recognized that many people need help. Look at how much Federal Aid poured into New Orleans after Kitrina, the list can go on and on.

Thanks for your honesty and open discussion.

[Young]

The market in Loudoun County has a ways to go down - watch for prices to fall for the next 2 yrs - credit or no credit

[San Antonio Real Estate]

We're faced with the same market in San Antonio. As long as these dead beats keep getting rewarded for not paying on their mortgages or giving freebies away to people who usually don't pay anyway we only worsen the problem. How about rewarding the good paying citizens and helping out the people who pay the bills...