I’m sure many real estate agents out there are throwing parties and dancing in the streets with the Senate passage of the so-called stimulus that includes a $15,000 tax credit for home buyers. The idea is that somehow this will magically rescue the housing market and (presumably) reverse the fall of home prices.
Personally, I’m not convinced it will do any such thing. Here is a good analysis of the program from Calculated Risk, who seems to agree with me.
This tax credit is being compared to the 1975 tax credit for homebuyers. However in 1975 the tax credit was for new homes only, and was intended to reduce the inventory of new homes, and help put residential construction workers back to work.
…
In this case the tax credit is for both existing and new homes. This is more of an incentive to get people to move as opposed to putting people back to work. Whereas there were few excess units in 1975 (except excess new home inventory), there are far too many excess units today.The sponsors and supporters of this tax credit believe this will support house prices – a mistake because this will mostly just shuffle homeowners between homes, and not reduce the excess supply.
…
The key problem for housing is prices are too high. How does this tax credit help reduce prices? Why are we trying to artificially increase the turnover rate? And why are we targeting a tax credit at higher income individuals?This tax credit seems ill-conceived, and probably should be removed from the stimulus package. No one has adequately explained how this helps “fix housing first”.
Your thoughts are welcomed.
Andrew » Feb 7, 2009 at 2:21 pm
I agree with your analysis, it will allow mostly for a shuffle of houses instead of increased home ownership. It wont increase house values but rather increase the purchase prices of houses selling n the next 12 months as sellers jack up prices a little to meet demand for people to “swap houses.” An earlier version gave this advantage only to “first time homebuyers.” I do not know whether this provision will stay in the bill but I would really like it to.
First, this would eliminate most of the problems you speak of above. Only people who don’t own a home at the moment (and havent in the last 3 years), will get the credit and therefore it will reduce inventory to some extent.
Second, it gives people like myself (just out of college) and people who have been responsible with their finances a reward for doing so these years instead of buying above their means. For a while now house prices have been so high that young people had very little chance of buying a home to start a family.
Does this mean the plan will work, I have no idea. Home prices still may have another 10-30% to fall and it wouldn’t do much more than delay this fall. However if the government is basically covering the first 10% of this fall if I buy this year, I’m game. Either way I plan on owning a home for a long period of time and am not overly concerned with short to mid-term resale value.
Jillayne » Feb 7, 2009 at 2:24 pm
Hi Tim,
I saw this CR article, too. Here are more bullets:
“The tax credit is 10% of the purchase price up to $15,000.
The tax credit is for one year (from date of enactment).
The credit is available for both new and existing home purchases.
This is for primary residences only, and the home must be owner occupied for two years after purchase.
There is no income cap (the $7,500 tax credit had an income cap of $150,000 per year).
Unlike the $7,500 tax credit, the new credit does not have to be repaid over time.
The credit is limited each year to the amount of taxes paid in any one year (with the $7,500 tax credit, buyers received the entire credit and a refund if the $7,500 was greater than taxes for the year)
Buyers can split the $15,000 into two separate tax credits to be taken in successive years.
Clearly this favors higher income tax payers as compared to the current $7,500 tax credit.”
This will bring some buyers off the fence. I’m definitely not thrilled that the credit seems to help higher income homebuyers.
Also, who is going to determine owner occupancy and what will happen if the homeowner immediately turns it into a rental?
We still also have the problem of our insolvent banks as well as the tighter underwriting guidelines and a massive recession on.
The credit will create a false bottom and irrational exhuberance from real estate agents that the housing recession is over.
How many months of inventory do we have hanging out there? We should add to that all the possible shadow inventory as well as the REO inventory that has not yet been brought to market.
LeftOverpricedSeattle » Feb 7, 2009 at 2:31 pm
My thoughts? This will do NOTHING to ease the problem. Who is going spend money now to save $15,000 when you can wait another year or three and save a $100,000?
However, in the “you can’t make this up file”…
“The Shire” in Bend has been given back to Umpqua Bank…
http://www.bendbulletin.com/apps/pbcs.dll/article?AID=/20090204/BIZ0102/902040353/1041&nav_category=
Who wouldn’t want to live with Frodo and Bilbo?
Herman » Feb 7, 2009 at 2:33 pm
This tax credit, like the stimulus, is wrongheaded. The people with money to inject into the economy are the ones who have been smartly conservative over the past 5 years and have cash reserves. I have a massive down payment saved but I’m unwilling to put it to use because housing still hasn’t corrected. We are “value buyers” who look at fundamentals.
And yet the government keeps coming out with gimmicks, cheap money, and efforts to sustain inflated prices. The cheap money and gimmick buyers are all underwater right now. Stop giving us more gimmicks.
If you want my money out of my mattress, here’s what needs to happen:
1) Let prices adjust down to actual values.
2) Stop confusing me with hints at future gimmicks like 4% interest rates
3) Show me prudent fiscal policy so I don’t feel like I need to hold a big reserve
Really. The value buyers are the ones who should be rewarded for their foresight and should now be taking charge of this economy. We should be rising to power on the strength of our wisely-kept cash reserves and we should run the economy for the next decade. But instead these policies keep us on the sideline and destroy our monetary value.
The US has rigged the system to keep the chumps and reckless spenders on top.
Does anyone understand what I mean? This is a war between spenders, savers, and the ones who are smart enough to know when to do which. People who saved over the past 5 years should be brought to power, as they turn into spenders and buy up assets for dimes on the dollar. This puts the smart ones in charge of the recovery.
DaveyDave » Feb 7, 2009 at 3:03 pm
This is helping people who don’t really need help. Namely, the ones who can get a loan for a home purchase. If you’re unemployed, you aren’t going to qualify. In addition, if you’re unemployed, you’re not going to qualify for Obama’s ‘tax credit for workers’ which was on his list of non-negotiables in hammering out the stimulus bill.
So for those out of work or soon to be, not only are you getting the short end of the stick as far as personal finances, but now your tax money is being used to further support those who are working and those that are purchasing homes.
It seems like this system is purposefully being designed to make things worse…
Matt » Feb 7, 2009 at 3:10 pm
More sales more money for the State!
The State needs to raise money this should work.
Plymster » Feb 7, 2009 at 3:26 pm
This is only being done to provide the illusion of government doing something for homeowners. Ultimately, it does so little, that it won’t even encourage home “shuffling”. The $15,000 tax credit barely covers the cost of selling the home and moving. It’s certainly not going to stem the 10% YOY drops the larger markets are seeing.
The bill as a whole is looking worse and worse as time goes by. Less actual stimulus (ie: job creation, investment in education, health care, infrastructure, state support), and more tax cuts for the wealthy.
So far, Obama is looking less like FDR, and more like Bush with oratory skills.
Kary L. Krismer » Feb 7, 2009 at 3:39 pm
What I said on another site is that this could help people nearing foreclosure. Locally in Seattle there are a lot of vacant listings, and there’s a limit to how long some of them can hold on.
Also, for those with occupied listings, a sale of their unit will typically generate another sale.
rose-colored-coolaid » Feb 7, 2009 at 3:41 pm
Thanks for the explanation. As the kind of person who would most benefit from this tax credit (high enough income, lots of cash, potential first-time buyer, etc) I can safely say this will do little or nothing to alter the market.
First off, the first-time buyer clause eliminates a huge subset of the population. Of the people who are left, you mostly have either long-time renters (guys in their 40s/50s who never bought) or people who haven’t felt they could afford to buy.
So basically, we’re just talking about people in their twenties. Literally everyone I know in their twenties who really “had” to buy did. There was no door on the henhouse.
So, here’s who might benefit: high income earners in their twenties with enough prudence not to buy during the boom, but who are now looking into purchasing their first home if they can get enough of a bargain on it. Are these the people who will rush out and buy as soon as the bill is signed? Doubt it. Instead, they’ll probably take this bill into account when shopping around. If they need an additional 20% off a $300k home to bite, they might be willing to go for only a 15% price drop since the tax credit evens out that other 5%.
Jillayne » Feb 7, 2009 at 3:43 pm
Bob Brinker, Money Talk has a good discussion going on the stimulous right now on 97.3FM.
DaveyDave » Feb 7, 2009 at 3:52 pm
Hi Kary…
…Thanks for participating. I enjoy reading your comments on other blogs. I’m not sure how the $15k tax credit can help someone who is facing foreclosure on their home. Would they not need to sell their home and then buy another in order to benefit from the credit? Presumably, the banks are not going to approve a new loan taking into account a tax credit, but still rely on the typical metrics.
deejayoh » Feb 7, 2009 at 3:55 pm
By Plymster @ 7:
???
What does Obama have to do with this? He has been in office what, 2 weeks? This is in the senate version of the bill only – and was added by a republican senator from Georgia who is a former real estate agent.
It is not a done deal by any means that this gets through to the joint version of the bill – for all the reasons outlined above.
Mikal » Feb 7, 2009 at 3:57 pm
RE: deejayoh @ 12 – As usual, you are right.
The Tim » Feb 7, 2009 at 3:58 pm
RE: deejayoh @ 12 – I assumed plymster’s comment about “Bush with oratory skills” was referring to “the bill as a whole,” rather than the specific $15k tax credit provision.
Cindy » Feb 7, 2009 at 4:03 pm
I volunteer for a consumer org full time. We get thousands of complaints annually on homebuilders who build homes with missing materials, code violations, leaks, foundation failure, etc. By around 2005 more of those complaints had elements of predatory lending. For years builders–and others in the industry who stood to benefit–pressured appraisers to inflate values, and used deceptive tactics to get buyers into loans. Builders were running their own mortgage co’s or at least had an “affiliated business arrangement” with a certain lender. Whistleblowers and investigations have led to knowledge now that lenders weren’t just foolishly approving loans for unqualified buyers, they were altering documents. Many in this industry should be going to jail. They certainly don’t deserve a bailout. And as for the builders’ “Fix Housing First,” it sounds more like “Me First.”
Mikal » Feb 7, 2009 at 4:07 pm
Kool aide at #9 You are right.
Scotsman » Feb 7, 2009 at 4:19 pm
This tax credit won’t even amount to a blip on the radar screen in terms of helping the economy, but it will allow politicians to claim they “did something” during the next election cycle.
Meanwhile, Ardell is calling the bottom over on Rain City Guide. OK, whatever.
As an aside, I haven’t smoked pot for about 20 years. Current evidence suggests, however, that the current crop is much, much more powerful than even the old Maui-Wowie. While we used to get happy and hungry, it appears the new stuff generates unbridled hallucinations of economic nirvana. Be careful out there
Masaba » Feb 7, 2009 at 4:19 pm
RE: rose-colored-coolaid @ 9 –
Is there a first time home buyer clause? It would make more sense if there was. However, from the way they calculated the cost on the Calculated Risk page, it seems like this will apply to all home buyers.
The Tim » Feb 7, 2009 at 4:20 pm
By Scotsman @ 17:
Comment of the day :^)
jon » Feb 7, 2009 at 4:53 pm
This provision does seem to be focused specifically on bailing out the real estate agents. The buyer is going to be creating a vacant apartment, or the seller is going to be effectively just swapping a unit with the renter. Reducing inventory requires people to move out of their parents home or to split up roommates. Since it would be especially ridiculous to have federal legislation at that level, they can’t do that, and so this provision is just basically pumping money in the general direction of real estate transactions and provides no benefit whatsoever to the taxpayers or country as a whole.
It is simply a shameful abuse of the power of government to benefit those people who will simply process the transactions of rearranging the deckchairs.
alex » Feb 7, 2009 at 5:09 pm
RE: Herman @ 4 –
Amen to that! Let prices correct all that’s needed, don’t inflate them with gimmicks!
David Losh » Feb 7, 2009 at 7:14 pm
RE: Cindy @ 15 –
You should all read this comment again. It is the crux of the Housing Sector problem.
There was massive market manipulation. The Master Builders Association along with the Board of Realtors were given a mandate by our government to promote home ownership.
It seemed like a good thing, it raised the stock market, and gave us an unprecedented era of prosperity. True wealth was created.
Wealth, true wealth, is the concept you are having a problem with. Market manipulation was a dream the Hunt Brothers had, but a guy like Buffet has achieved.
The Housing Sector was the end of a long line.
Bill Gates owned and controlled a true monopoly. In my opinion Bill Gates could also manipulate a market of his choosing. He even might, who knows?
This is the reference to the Hunt Brothers.
The Hunt Brothers and the Silver Bubble
Brian Trumbore
President/Editor, StocksandNews.com
In 1973, the Hunt family of Texas, possibly the richest family in America at the time, decided to buy precious metals as a hedge against inflation. Gold could not be held by private citizens at that time, so the Hunts began to buy silver in enormous quantity.
In 1979 the sons of patriarch H.L. Hunt, Nelson Bunker and William Herbert, together with some wealthy Arabs, formed a silver pool. In a short period of time they had amassed more than 200 million ounces of silver, equivalent to half the world’s deliverable supply.
When the Hunt’s had begun accumulating silver back in 1973 the price was in the $1.95 / ounce range. Early in ‘79, the price was about $5. Late ‘79 / early ‘80 the price was in the $50’s, peaking at $54.
Once the silver market was cornered, outsiders joined the chase but a combination of changed trading rules on the New York Metals Market (COMEX) and the intervention of the Federal Reserve put an end to the game. The price began to slide, culminating in a 50% one-day decline on March 27, 1980 as the price plummeted from $21.62 to $10.80.
The collapse of the silver market meant countless losses for speculators. The Hunt brothers declared bankruptcy. By 1987 their liabilities had grown to nearly $2.5 billion against assets of $1.5 billion. In August of 1988 the Hunts were convicted of conspiring to manipulate the market.
b » Feb 7, 2009 at 7:24 pm
RE: Andrew @ 1 –
If you are just out of college, I can pretty much garauntee you that nowhere you buy is going to be long term. Its infeasible at that point in your life. Maybe if you were 40+ I would agree its possible to find a house you _might_ have a 20 year horizon in, but when you are 22/23? I doubt it.
Nick » Feb 7, 2009 at 8:58 pm
It’s a taxpayer money payout to Realtors, home builders, and banks: nothing more, nothing less. It will give money to Realtors through sales, and home builders and banks by being able to sell their houses for ~$15k more during the next year (they will be the overwhelming majority of the sellers, since they are the only home holders pricing to market). It doesn’t make housing any more affordable (obviously, since it makes it less affordable), it doesn’t help the market (in fact, it prolongs the downturn), it doesn’t do anything to help the economy (no jobs will be created or saved in the private sector), and it doesn’t have any long-term benefit.
As for the question of good/bad, I suppose that entirely depends on your view of taking ~$40 Billion of taxpayer money and handing it out to Realtors, home builders, and banks, while elongating the downturn. I’d guess you’d get more “bad” votes than “good” votes if you pitched it that way (which we’ll call “accurately and transparently) to the American voters; fortunately for the NAR, home builders, and banks, they have more lobbying power with our comprehensively corrupt Congress, so their vote is the only one which apparently matters.
ejhickey » Feb 7, 2009 at 9:03 pm
ejhickeyRE: Jillayne @ 2 –
“Also, who is going to determine owner occupancy and what will happen if the homeowner immediately turns it into a rental?”
Are you suggesting that we can’t trust people ? That people might actually lie inorder to get a tax credit?
offline » Feb 7, 2009 at 9:17 pm
RE: Herman @ 4 –
I was watching yesterday’s labor data hearing and one senator was asking for some document on how “dollar depreciation†(later he added word “dollar appreciation†with a pause) will help the economy. I felt like something is going on there.. There might be a plan to artificially depreciate US dollar.
With this stimulus, housing rebates and lowering existing mortgage (like free money??)… Without any doubt, I think, they are wiping out savers. These morons are trying to spread our wealth (by depreciating the dollar). Folks, we need to get out of dollar before it’s too late.
AMS » Feb 7, 2009 at 9:26 pm
RE: Jillayne @ 10 –
Yea, well, I have a friend who followed Brinker’s advice to purchase a home just before the peak. Brinker now says that no one could have predicted the current situation…
Objectivity » Feb 7, 2009 at 9:55 pm
Aren’t we forgetting something?
We still need financing to buy a house….and that’s still not available.
We are going to be Japan of the 90s. The only way for capitalism to work is to allow capitalism to work. All this crap is pure fluff. I feel terrible for my daughters generation. If you think we have it bad, wait until you see the s*it-show they inherit.
I’ll be happily practicing bankruptcy law, and renting a house for the next several years. These articial fixes of the economy will only prolong the pain.
S-Crow » Feb 7, 2009 at 10:06 pm
Financing is available. FHA is assisting many with lower credit scores but verifiable income, employment,etc… Conventional financing is available as well.. The number of lenders has certainly shrunk. The pool of qualified “buyers” has certainly shrunk due to guidelines and market confidence/conditions. But you can still buy with little down going FHA.
Johnson » Feb 7, 2009 at 10:16 pm
In capitalism, rich man turrns the wheel. Poor or unemployed is no value. That was the fight of American’s worst enemies – now touching own people. New 15k tax credit will help to roll the wheels..
David Losh » Feb 7, 2009 at 10:36 pm
The financing is the problem. Purchasing homes is what people will do no matter what. The problem is financing those purchases.
All you have to do today is pick a house, any house, and look at the financing package in place. If it works for you then take over the contract. Set up an escrow account and make the mortgage payments through that. Pay the taxes separately with your own check.
OK, I said that, but you should seek legal advice because the lender has the right to accelerate the Note, but in my opinion the lender would be happy to be paid at all. As always, pay the mortgage off as quickly as possible or makes sense with the amortization schedule and the value of future money.
The problem is churning more mortgage paper through the system.
As you know I could ramble on, but what the government wants is new Financial Instruments to bolster confidence in the Financial Market.
New mortgages, no matter how solid, or because they are solid, will prolong the decline of pricing, which has to happen.
Ray Pepper » Feb 7, 2009 at 10:48 pm
The 15k, the interest rates, the home price declines, are all setting up for some nice advertising coming this Spring for the NAR across the country. Will it be enough? Of course not. Will it stop foreclosures or slow them down? Absolutely NOT! People will NOT stay in their homes when upside down triple digits. GUARANTEED! The only thing that will work (other then time) is principle reduction. However, If this occurs there will be anarchy.
So my friends lets all sit back together and watch how it pans out. This will run its course and we will all learn together that the next decade is one for the history books!
mukoh » Feb 7, 2009 at 10:53 pm
I was talking at lunch today with my realtor who is a long veteran of builders, developers, investors and banks field, no retail transactions ever. He was laughing at how agents at his office are clapping cheerfully that this thing passes. Sure it will cause some people to go off and buy one. As a whole its nothing huge.
David, are you nuts? Where did you get your RE license? You can’t take over notes unless there is a clause for assumption of loan. Go read some notes in the county records. In most assumable notes, which there were probably only 5-10% in good ole days the lender still has to approve the assuming party.
Kary L. Krismer » Feb 7, 2009 at 11:07 pm
DaveyDave wrote: “Thanks for participating. I enjoy reading your comments on other blogs. I’m not sure how the $15k tax credit can help someone who is facing foreclosure on their home. Would they not need to sell their home and then buy another in order to benefit from the credit?”
What I’m saying is this will make it more likely someone will buy their house, rather than it being foreclosed. It won’t help the distressed homeowner get a new loan. That will take the passage of time.
David Losh » Feb 7, 2009 at 11:18 pm
RE: mukoh @ 33 –
I was talking about a wrap around. go ask your;
my realtor who is a long veteran of builders, developers, investors and banks field, no retail transactions ever.
It was done in other down markets when there were no assumable loans except VA. It was coming back last year when the market prices started going down and there was no reason to “bail out” a home owner from a declining asset.
Now it looks as though, depending on what the amortization schedule may be and what you believe the future value of money will be, it may work in a buyer’s favor. Of course get legal advice.
You’re an amateur investor. Ask your buddy.
AMS » Feb 7, 2009 at 11:26 pm
RE: Kary L. Krismer @ 34 –
“What I’m saying is this will make it more likely someone will buy their house, rather than it being foreclosed. It won’t help the distressed homeowner get a new loan. That will take the passage of time. ”
So the relationship of renters to owner occupied units will go which direction? Since the current homeowner cannot get a new loan, he will become a renter.
Kary L. Krismer » Feb 7, 2009 at 11:27 pm
Due on sale clauses are not recognized under Washington law. Unfortunately the federal GARN act overrides Washington law. Thus if you have a due on sale clause the bank can call the note due with any sale. Whether they would or not is another matter. But I don’t think many attorneys would recommend taking that risk.
Last year I was calling for the GARN act to be repealed. Most the hard hit states (CA, AZ, FL) have laws similar to Washington, and repealing the act would prevent foreclosures on houses that are not that upside down. For ones really upside down, and in distress, a short sale is the only hope.
Kary L. Krismer » Feb 7, 2009 at 11:31 pm
AMS wrote: “So the relationship of renters to owner occupied units will go which direction? Since the current homeowner cannot get a new loan, he will become a renter. ”
Yes the owner would become a renter if they are in distress and living in their home. But if the vacant house is on the market because they bought first and are already in another home. then the person buying the vacant home very well could be leaving a rental situation.
Scotsman » Feb 7, 2009 at 11:35 pm
I wish it were true, mukoh. Unfortunately, our congress may be getting ready to rewrite our laws and existing contracts before our very eyes. In the new socialist order, “cramdowns” will be allowed. And as Ray says, anarchy may be the result.
Got popcorn? The show is about to begin!
RE: mukoh @ 33 -
Joel » Feb 7, 2009 at 11:38 pm
$15,000 is what? 4 months of depreciation? This will only encourage buying among the rich and stupid.
mukoh » Feb 7, 2009 at 11:41 pm
David,
I am an amateur investor? LOL. And this is coming from a guy who doesn’t even know what assuming a note takes. You crack me up. I can buy the note from the bank for cheap lets say 30% discount, why would I assume it at 100%? Sorry bud you are out of line on the amateur part.
mukoh » Feb 7, 2009 at 11:44 pm
Scotsman,
The new cramdown laws that are being peddled out there are ridiculous. If they do pass it will give homeowners and the likes of myself to cram my mortgage down through court to a level that my attorney finds fit. It will be a judges order that the mortgage company has to take. I find it really out of whack. In that case even people who were not facing any issues will take $100k-$300k cram downs through court and be happy doing it.
patient » Feb 8, 2009 at 12:03 am
The $15k will do…absolutely nothing. How do I know? The median prices is down more than $60k, has it put in a bottom and made all fence sitters jump in? Is sales volumes through the roof? Not really, so why on earth would $15k deduction be any different? It’s an absolute shameful idiotic plan that would make me very, very disappointed if it passes. I had big hopes for the new adminstration and president but if they don’t put a fork in this that hope is gone. It’s as Plymster said: same old but with better oratory skills.
mukoh » Feb 8, 2009 at 12:21 am
Patient,
The whiney retail realtors will spin this to their clients as a huge benefit, same way DPAs, 80/20s, and such were spun years ago. Some not so smart people as we know there is at least 60%+ of them out there will bite. Thats what the administration IMO hopes.
patient » Feb 8, 2009 at 12:30 am
Good point mukoh but you would think even the not so smart would ask for the deadline to qualify and if there is a deadline why not wait and get both depreciation and the credit? How are the going to spin that? If the deadline is short like a couple of months they might get a few buyers in quickly if it’s longer even the not so smart will realize the scam.
AMS » Feb 8, 2009 at 12:36 am
RE: Kary L. Krismer @ 38 –
Let’s look over the entire situation, long-term. The vacant home situation that was formerly owner-occupied will not help the renters to owner-occupied ratio.
Step 1. Owner moves out to rental unit. This reduces the percentage of owner-occupied units.
Step 2. Home is sold to someone who will occupy the home.
At this point we are even.
I doubt there are many vacant rentals being sold to someone who will also occupy the home.
Overall owner occupied percentages have been falling.
http://www.census.gov/hhes/www/housing/hvs/hvs.html
Scotsman » Feb 8, 2009 at 12:38 am
Mukoh- I don’t doubt for a minute that those who get the benefit of cramdowns will be thrilled. My guess is that for most it won’t do all that much to help those who are already in a weak position, only delaying the next writedown. What is it, something like 50% of those who have gotten their mortgages rewritten have gone on to eventual default anyway?! Pfffft.
It will be a gift for a few, who like you may not need them but are smart enough to manipulate the system to their benefit. Overall, they will be a disaster. And the social unrest that grows out of such a program will become the real issue. Riot, baby, riot.
mukoh » Feb 8, 2009 at 12:52 am
Scotsman,
I totally agree. Its a total disgrace, but the majority of the population “suckers’ think its a huge favor.
People who know and learn and take advantage are always ahead, yet the over consuming public even using all the straws in the pile is always behind the curve.
Don’t hope for riots, too much guns out there, can get ugly.
Kary L. Krismer » Feb 8, 2009 at 7:32 am
mukoh wrote: “The new cramdown laws that are being peddled out there are ridiculous. If they do pass it will give homeowners and the likes of myself to cram my mortgage down through court to a level that my attorney finds fit. It will be a judges order that the mortgage company has to take. I find it really out of whack. In that case even people who were not facing any issues will take $100k-$300k cram downs through court and be happy doing it. ”
Assuming they limit it to bankruptcy court, you’d need to file a Chapter 13 and live under their rules for at least three years, so I don’t think it’s going to be a popular option for people without other issues. Also, for most credit, they determine the date of a chapter 13 as being the end, rather than the beginning, so count on many years of messed up credit.
Finally, owner-occupied residential mortgages are the only debt that the bankruptcy court can’t “cramdown” except in Chapter 11 where they can. This is not as big of a deal as the banks make it.
Kary L. Krismer » Feb 8, 2009 at 7:38 am
AMS, one other factor on the vacant rentals thing–the biggest benefit of this credit will be condo owners, because condos typically sell for lower prices. To the extent more condos sell it could reduce the supply of apartments, because I don’t think we’re necessarily past the situation where condos convert to apartments.
Clearly anything that stimulates house purchasing will have a negative effect on the rental market. I just think it’s rather difficult to determine how significant that effect will be. We can’t even figure out how many more housing units will be sold because of the credit, so how could be determine the effect on the rental market?
Kary L. Krismer » Feb 8, 2009 at 8:19 am
Harney had a piece in the Seattle Times today on cramdown. Here’s the LA Times link to it: http://www.latimes.com/business/la-fi-harney8-2009feb08,0,7138711.story
It’s pretty accurate except the part at the end where he indicates some hope the banks will become more responsive as a result of this.
kfhoz » Feb 8, 2009 at 10:23 am
RE: Herman @ 4 –
I agree with Herman. The extra whammy is that much of our savings was in the stock market. I am now seriously wondering if we should have in the past, and even now, just use all our money to buy expensive stuff and let the government look after us.
The people who are getting bailed out, or their mortgages knocked way down, or doing short sales, etc are mostly living in nicer bigger houses than I am, and driving nicer cars. Remind me again what I am getting by being responsible … ? Don’t say it is anything like a “good feeling of satisfaction” because I am feeling like a chump right now.
David Losh » Feb 8, 2009 at 10:25 am
RE: mukoh @ 41 –
OK you take the note. Now what? It’s not performing and you are selling in a down market.
A wrap around is pretty common in many markets. As the holder of the Note I would want the income, no matter who pays.
The point is you are buying the Note at a discount. You can also structure the sale of the property under a discounted contract.
Here’s my prediction as things go forward. Your renter will lose a job and not be able to pay rent. They end up out on the street with States cutting welfare. Neighborhoods will change, and people will cram together in housing units.
In my opinion we are moving past what home owners will do, they are walking away. Next we are going to be dealing with what renters will do.
A desperate renter will be looking for money where ever they can.
Yes i know how Notes work, it’s different from what I believe is good business.
Interloper » Feb 8, 2009 at 10:35 am
I like the $15K tax credit as a piece of policy.
- I think it would have a stimulative affect on the economy as a whole. Home sales would increase during the 1-year duration of the policy — and let’s face it, regardless of what you think about home prices, the low volume of sales and inability of people to move is a damper on the economy. Later, when people get the resulting tax refund, there’s a decent chance they will spend it on their home which would also be stimulative.
- For non-homeowners/renters it would be a hedge against future losses from price decline, but not so large a hedge to make people act irrationally. There’s no way I’d be persuaded by a $15K tax credit if I thought the value of my home would fall another $60K. A $15K tax credit is similar to the seller’s costs of unloading a $250,000 home — so it wouldn’t encourage people to move who don’t otherwise want to move.
A year from now if I thought Seattle price declines were about done (a huge “if”), I would certainly try to buy in time to get the tax credit. Also, it’s possible the tax credit could get extended to a later time when the risk of purchasing a declining asset would be lower.
I can’t imagine the $15K tax credit reversing the fall in prices that needs to run its course, unlike the 4% interest rates which were shot down by the Senate last week — 4% interest rates would have been a policy disaster.
While it’s no “solution” to the housing situation, the $15K tax credit has merit as a stimulus. I’m surprised these points haven’t come up.
Jonny » Feb 8, 2009 at 10:42 am
stupid idea
David Losh » Feb 8, 2009 at 10:47 am
RE: Kary L. Krismer @ 37 –
Congress should revisit the Garn Act, but the Act also reads “Permits” and “May” enforce the due on sale clause.
Today the incentive for taking back more properties seems very low.
The Stimulus Bill should address contracts already written and in place. There are millions of them. I don’t see that “churning” loans, replacing old loans with new ones, is going to get the job done.
As the mukoh guy keeps pointing out the discount on Notes is pretty steep. I don’t track it myself, but if he says so it seems about right to me.
There is a limit also on how much cash can be invested in Notes. The real qustion is if Notes are that solid of an investment right now.
It makes sense to me that investors may want to rewrite a Note with a home owner for a higher return than selling for cheap.
Objectivity » Feb 8, 2009 at 10:56 am
There are exceptions to every rule. As I practical matter, I think we both agree lending has dried up significantly.
Russ » Feb 8, 2009 at 11:25 am
An unintended consequence of the $15k credit could be a reduction in 401k or HSA contributions. Part of the benefit of these accounts is to reduce the amount of taxable income. If you are at a payscale that would not allow you to take full advantage of the credit, then you may want to increase your taxable income to allow for a larger credit. Does this make sense?
Kary L. Krismer » Feb 8, 2009 at 11:41 am
David Losh wrote: “The Stimulus Bill should address contracts already written and in place. There are millions of them. I don’t see that “churning†loans, replacing old loans with new ones, is going to get the job done.”
What it does is this. Let’s say at the beginning of 2008 you held $100,000,000.00 of mortgage backed securities from 2006. Reduce interest rates to under 5% and suddenly you probably only hold $60,000,000.00 of mortgage backed securities, because the others have refinanced and paid you off. Streamline refinancing, loosen lending restrictions on those with over four houses, etc., and pretty soon you only hold $40,000,000.00 of mortgage backed securities.
At the beginning of 2008 you didn’t know how much of the $100,000,000.00 was bad. It could have been all of it, half of it, none of it. By the time you get down to $40,000,000.00, not only do you have $60,000,000.00. but you also have a pretty good idea that a good portion of the $40,000,000.00 is at risk. At a minimum there are either income or equity issues with such debt, because otherwise it would have been refinanced and you’d have $100,000,000.00 in cash.
BTW, this assumes most the new loans are held by government entities or at least not entities in trouble.
Kary L. Krismer » Feb 8, 2009 at 11:44 am
Russ wrote: “An unintended consequence of the $15k credit could be a reduction in 401k or HSA contributions. Part of the benefit of these accounts is to reduce the amount of taxable income. If you are at a payscale that would not allow you to take full advantage of the credit, then you may want to increase your taxable income to allow for a larger credit. Does this make sense? ”
Great thought, but do they care? They want spending, not saving. So perhaps they see that as an acceptable trade off.
Also, the 401k has benefits to money being inside, so it’s not entirely the initial contribution benefit.
Russ » Feb 8, 2009 at 11:51 am
RE: Kary L. Krismer @ 60 –
Right, but I could just put that money into a Rith IRA once I get my full credit, thus never paying taxes on that money.
mukoh » Feb 8, 2009 at 12:05 pm
RE: David Losh @ 53 –
You make no sense whatsoever in that comment, or you don’t know what you are talking about.
Me » Feb 8, 2009 at 1:54 pm
One impact of the 15k tax credit would be to slow the decline in prices, especially in the lower valued properties where 15k would be close to 10%.
Earlier posters commented on this as creating a false bottom or just slowing the decline. This is not necessarily a bad thing.
Slowing the decline means less homeonwers will be underwater and those that are underwater will be less in negative territory. The market will still find its bottom eventually after the tax rebate expires, but this added time before hitting the bottom can have some significant benefits:
Homeowners who aren’t underwater have more incentive to continue paying their mortgage and will gradually build up equity. Meaning that they have more skin in the game –> Less walkaways.
I don’t want to get into the discussion about ethics of walking out on a mortgage when underwater, but for the system as a whole walkaways are bad (increased costs for everyone) so if this tax incentive can keep the homeowners that are close to being underwater making their payments then it make the system healthier.
RE: size of the incentive. It’s small enough that it won’t spur lots of new building but it may help absorb a small ammount of the excess inventory.
RE: “increse in home churn” (i.e. people just moving from one place to another). This isn’t necessarily a bad thing. In recent years the credit was so loose that people got into properties that were inappropriate for their income. You have a lot of high earners living in properties that are below what they should be living in based on their income because of the bubble in prices and you have low earners living in places that are higher end than they should be living in because of the creative credit options. Now that credit is being applied more appropriately according to ability to pay, it is a good thing to increase churn to help get people balanced into properies that fit their income. Additionally it will get some people into new mortgages with appropriate ammount of down payment which will further decrease the risk of forclosure down the road.
trccscott » Feb 8, 2009 at 5:03 pm
If the Feds really wanted to help first time homebuyers, why has no one addressed the $10,000 limit for a no penalty withdrawl from a 401K or IRA for the first time purchase of a home? With all the emphasis on the importance of a down payment now, $10,000 is a pretty small number even though some folks may have banked $100K or more in such plans!
Kary L. Krismer » Feb 8, 2009 at 5:47 pm
Me wrote: “In recent years the credit was so loose that people got into properties that were inappropriate for their income. You have a lot of high earners living in properties that are below what they should be living in based on their income because of the bubble in prices and you have low earners living in places that are higher end than they should be living in because of the creative credit options.”
The problem is the latter group probably doesn’t have much equity, and I think it would probably be tough to do a short sale and then get credit to buy in the short term (e.g. 2-3 years).
The former group (high income, low end house) will actually benefit twice, on both their sale and their purchase. I call many government first time home buyer programs second time buyer programs, because it really benefits the sellers of a starter home. This 15k rebate is probably a first, second, third, fourth, etc. time home buyers program.
Herman » Feb 8, 2009 at 6:26 pm
RE: kfhoz @ 52 –
The problem is the government doesn’t want us to be responsible. (It doesn’t want to be responsible either.) We are fighting upstream. The existing structure is biased toward risk-taking and assumption of debt.
Paul Grignon’s movie Money As Debt explains it better than anything else I’ve seen. When the people or the government take on debt it creates wealth – by bringing it from the future to the present.
The velocity of new debt therefore adds to growth. When that velocity stops or reverses direction, then wealth is reduced.
Consider – when you take out a loan, both parties get present-day value. You get cash, and the lender gets a promise of an annuity. The promised annuity has a “present value” that is greater than the money he lent. This is demonstrable, given that banks sold those annuities as mortgage-backed securities for a profit.
I know it doesn’t seem possible for a loan to create present-day value for both parties, and it should be zero-sum. But it’s not. The loan actually creates present day wealth and it is not zero-sum.
This is a great system as long as everyone believes in the future promise. When that belief falters then:
1) the present-day value of the annuity sinks
2) the ability to create new debt disappears
3) the net velocity of debt reverses direction
…all destroying wealth. The government doesn’t like that and actively resists it, and will punish you for working in the opposite direction. The government also doesn’t like all this negative talk since it destroys confidence in future-payments on annuities, which hurts their present-day value.
Anti-savings is baked into the system, and that’s why I equate this to a revolution.
98115_Renter » Feb 8, 2009 at 6:29 pm
$15k/2buyers/2years = $3750/person/year = nothing.
Besides, for the market to move again there needs to be lots of new buyers entering the market. Considering the numbers of foreclosures, layoffs, and excess housing supply, and the fact that many entry level first time buyers don’t even have that much tax liability so cannot take advantage of this credit, this whole thing turns into a big nothing, or a tax credit for the rich introduced by a republican senator.
David Losh » Feb 8, 2009 at 7:32 pm
RE: Kary L. Krismer @ 59 –
Again you’re talking about propping up the Financial Markets. People can refinance all day long. There is no guarantee of future performance unless the borrower has confidence.
“At a minimum there are either income or equity issues with such debt, because otherwise it would have been refinanced and you’d have $100,000,000.00 in cash.”
Alright let’s get to it. Your $100,000,000.00 starts making a return out of the gate. You want more. You want things to be the way they were before. You want the borrower to pay you. The loan is on an over priced asset. Then you have the problem that there are a bunch of very bad loans out there that were written by the bank.
People are feeling stupid for signing these bogus loans. The people don’t like you, They feel ripped off.
You can talk big numbers or how smart an investor you are, but the game has changed dramatically. I don’t see where your cash can go. I don’t see a return unless something is addressed with the end user.
I think people are getting smarter.
Something has to give and it should be the people who wrote these loans.
Kary L. Krismer » Feb 9, 2009 at 8:00 am
Actually David, I’m talking about the banks having confidence so that they can feel safe to start loaning money to businesses (and consumers on things like cars). The residential housing lending is already adequately dealt with.
But with banks not being able to determine the value of their assets, they don’t know how much money they can lend. They don’t want to be the next WAMU, so they’re conservative on the lending. In my example, if they get $60,000,000.00 back, they know that’s worth $60,000,000.00, and presumably they won’t make the same mistake again with where they put any of that money that is retained and not loaned out.
Buyer confidence is another matter entirely.
David Losh » Feb 9, 2009 at 5:06 pm
No matter how much money the bank has, or how confident they are, they need some one to take the loan. Car loans, credit cards, mortgages, and student loans are turning out to be really over priced.
It should be getting clearer to people that those contracts they sign are a very bad deal. If banks want to continue to do business they need to address the mess they made.
Blaming the consumer seems to be the scape goat.
In my opinion as we go forward it will all be about consumer perception. The bank should be figuring how to fix the loans they have out standing.
Rather than setting higher standards for future loans they need to get past loans to perform.
This post is about the tax credit impact on consumer confidence to make a purchase. I don’t see how a third party interference is giving the scope of help that is needed right now,
explorer » Feb 10, 2009 at 11:24 am
I agree with a comment I read, outside this board, that the $15K credit is a “flippers reward.”
Even If you are not a flipper, when something is still $100K or so overpriced, that $15K does not mean squat in the big picture.
$15k Tax Credit On the Chopping Block | Seattle Bubble — News & discussion about real estate & the housing bubble in the Seattle area. » Feb 11, 2009 at 11:23 am
[...] looks like the $15,000 homebuyer tax credit may not make it into the final “stimulus” plan after [...]