Seattle Bubble

News & discussion about real estate & the housing bubble in the Seattle area.

Seattle Bubble - News & discussion about real estate & the housing bubble in the Seattle area.

Entries Tagged as 'government_meddling'

Extension to Fraud-Laced $8k Homebuyer Tax Credit to Piggy-Back on Unemployment Bill?

By The Tim on October 21st, 2009 at 6:00 AM · 38 Comments

Here’s a pair of somewhat conflicting stories about the push to extend and expand the inefficient, expensive, economically stupid $8,000 first-time homebuyer tax credit.

From the real estate news source Inman News: Final push for tax credit

Real estate industry trade groups are mounting a final push for an extension of the first-time homebuyer tax credit, with Sen. Johnny Isakson planning to tie the issue to an extension of unemployment benefits.
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In testimony before the Senate Banking Committee today, Isakson, R-Ga., said he plans to introduce an amendment to legislation extending unemployment benefits that would make the current $8,000 tax credit available until June 30.

Isakson’s amendment would raise the income limits for the credit to $150,000 for individuals and $300,000 for a couples. The existing tax credit can’t be claimed by individuals making more than $95,000 or couples with adjusted incomes of more than $170,000.
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The estimated cost of his latest proposal would be $16.7 billion over five years, Isakson said, citing the Joint Committee on Taxation.

So apparently the latest plan is to pull a common DC trick and tack the bill onto something else that would be political suicide to vote against. This disgusting ploy usually works, and if they pull off adding it to the unemployment bill, it is almost guaranteed to be passed. Also, considering that the current credit is probably going to cost in excess of $15 billion versus an original estimate of $6.6 billion, it seems likely that if passed, this proposal would cost us another $30 billion or more that we don’t have.

Next up we have a different outlook on the credit, via Calculated Risk: Home Buyer Tax Credit DOA?

From Reuters: White House skeptical on renewing home buyers credit
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And more from Reuters on the widespread fraud: IRS warned again of U.S. homebuyer credit fraud
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From Diana Olick at CNBC: HUD Hints on Home Buyer Tax Credit . Olick reviews Donovan’s testimony and writes:

[T]hat sounded more like a “No” to me than a “Yes.”

And Rex Nutting at MarketWatch reviews many of the arguments against the tax credit: Kill the wasteful home-buyer tax credit

Note in the second story CR points out that the IRS “has opened 107,000 civil cases related to the credit.” If we go by the NAR estimate that around 1.9 million buyers “will take advantage of the $8,000 tax credit this year,” the 107,000 civil cases represent a potential fraud rate of over 5%. Who could have guessed that when the government starts handing out free money, people would race to game the system?

I apologize for the overload of posts recently regarding the $8,000 tax credit, but I feel strongly this is an important issue related to real estate. The tax credit is wasting money, harming potential buyers by hampering the natural correction of the market, and helping to push the rental vacancy rate higher, which causes further pain for local and regional banks. The government needs to stop trying to prop up a broken market and let home prices fully correct.

Here is the contact info for our senators. I encourage you to call or fax them and encourage them to vote against any form of extension, renewal, or expansion of this wasteful and counter-productive spending spree.

Patty Murray
Phone: 202.224.2621
Fax: 202.224.0238

Maria Cantwell
Phone: 202.224.3441
Fax: 202.228.0514

[This story was corrected on 10/20 at 11:00 AM to indicate that the 107,000 civil cases opened by the IRS represent potential fraud, not necessarily actual fraud.]

→ 38 CommentsCategories: News
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Estimating the Local Effects and Aftermath of the $8,000 Tax Credit

By The Tim on October 16th, 2009 at 6:00 AM · 60 Comments

Organizations like the National Ass. of Realtors and the National Ass. of Home Builders have been throwing around estimates of how many sales have been “stimulated” by the $8,000 tax credit nationwide, and a recent editorial by Washington State Treasurer James McIntire in favor of the inefficient, expensive, and economically stupid program throws out a number of 7,000 “stimulated” sales statewide.

How many sales locally have been “stimulated” by this ridiculous giveaway of tens of billions of dollars we don’t even have? Let’s try to see if we can estimate the number of stimulated single-family house sales for King County, using some trend analysis of closed sales data from 2000 through 2008.

2000-2009 King Co. SFH Closed SalesKing Co. SFH Closed Sales (2009 Hypothetical)

At left above is a chart that includes total closed sales each month from 2000 through 2009, with October and November data this year projected based on the May – September performance. At right above is a chart of a hypothetical “worst case” scenario of sales volume we may have seen without the influence of the $8,000 tax credit, generated by taking the average month-to-month change for each month in 2000-2008, and applying that from month to month in 2009, moving forward from the number of actual sales in April.

King Co. SFH Projected Sales: January - November 2009The “worst case” estimate at right above most likely understates the number of sales that would have taken place without the tax credit, since decreasing prices were already beginning to stimulate sales anyway, but for the sake of argument, let’s go with this estimate. Using the above estimates, we arrive at a total number of 3,850 tax credit “stimulated” sales of single-family houses in King County.

If we assume that 100% of the stimulated sales and 75% of the “worst case” baseline sales (i.e. – sales that would have happened anyway without the tax credit) were qualified first-time homebuyers, we can calculate that 11,911 sales will qualify this year for the tax credit. That’s a total cost to (future) U.S. taxpayers of over $95 million, for 3,850 “stimulated” SFH sales in King County—$25,000 per sale.

This is actually quite a bit lower than the nationwide estimates I have seen elsewhere, which put the cost per “stimulated” sale at around $43,000, which means we’re probably over-estimating the number of “stimulated” sales. With 60% as many “stimulated” sales (2,310), the cost per “stimulated” sale comes out to around $40,000.

If we assume that the lower number (2,310) is more reflective of reality and that roughly 90% of these sales were not pulled from thin air, but were in fact merely borrowed from 2010, we can calculate the approximate effect of the expiring tax credit on 2010 sales. Based on those assumptions, once the tax credit expires, we can expect sales to come in roughly 125 to 200 lower than they otherwise would have each month throughout 2010.

King Co. SFH Closed Sales (2010 Hypothetical)

Of course, that assumes that the tax credit will be allowed to expire, which is looking less and less likely. Not that extending it another six months to a year will somehow prevent the market from having to pay back the borrowed sales eventually (at a greater and greater cost the longer it is deferred), but why should pesky little economic realities prevent Congress from spending billions of additional dollars that we don’t have?

→ 60 CommentsCategories: Statistics
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Lawrence Yun: “Home values have overshot downward”

By The Tim on October 11th, 2009 at 3:58 PM · 48 Comments

In case there is any doubt about whether NAR chief “economist” Lawrence Yun is just as much of a shameless price-boosting shill as his predecessor David Lereah, I present some excerpts from a post he made on Friday regarding the inefficient, expensive, and economically stupid homebuyer tax credit: Unleashing Pent-Up Housing Demand and Sustainable Economic Recovery

There is no delight in watching the budget deficit soar. The $1.4 trillion deficit in the completed 2009 fiscal year to September is the highest ever in the U.S. in sheer dollar figures, and the highest since the Second World War if measured in relation to the overall economic pie. It’s a huge burden to the future generation and could easily cause interest rates to rise much sooner and quite sharply. Washington needs to come out with a credible plan to reduce the deficit over time.

However, one area where federal taxpayer dollars have effectively been utilized is in providing a homebuyer tax credit. The key to any future sustainable economic recovery lies in home values stabilizing or, better yet, a return to a historical appreciation rate of 3 to 5 percent each year. The bubble prices crash landed. All the excesses have already been removed. In fact, one could legitimately argue that home values have overshot downward.
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It would be an utter pity if the housing market, just at the cusp of self-sustaining recovery, rolls downhill again. That could indeed happen if potential buyers step back and inventory again climbs. Falling home values – independent of whether overcorrecting is happening or not – will bring back all the associated collateral damage.

A much happier scenario would be that the buying momentum continues for few additional quarters such that inventory falls back down to the normal 5 to 7 months, a level consistent with home value stabilization. Once that is accomplished, the consumer “fear factor” of waiting and waiting for a lower price later down the road will no longer be part of home buying decision.
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For that happy scenario to play out, a time extension on the home buyer tax credit is critically needed.

Unfortunately the full post is available only to registered members of the real estate professional’s social network ActiveRain. If you for some reason have a desire to read the whole thing, drop me an email and I can email it to you.

→ 48 CommentsCategories: News
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Poll: What is the chance the housing tax credit gets extended/expanded?

By The Tim on October 11th, 2009 at 12:05 AM · 4 Comments

Please vote in this poll using the sidebar.
Props to AMS for the poll idea.

What is the chance the housing tax credit gets extended/expanded?

  • None (5%, 5 Votes)
  • Low (9%, 10 Votes)
  • Medium (21%, 23 Votes)
  • High (51%, 57 Votes)
  • Done Deal (14%, 16 Votes)

Total Voters: 111


This poll will be active and displayed on the sidebar through 10.17.2009.

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$8k Tax Credit: Inefficient, Expensive, Economically Stupid

By The Tim on October 8th, 2009 at 10:30 AM · 59 Comments

The intensity of the push from a couple of major national lobbying groups (NAR and NAHB) to extend and/or expand the $8,000 first-time homebuyer tax credit seems to have increased since we last discussed the topic on these pages. With the supposed end of the program coming up in about seven weeks, now seems like a good time to broach the subject again.

Here’s the latest news on the status of a possible extension: Democrats May Extend Tax Credit for Homes

Democratic Congressional leaders are working with the White House to extend an expiring $8,000 tax credit for first-time home buyers, and aides said Wednesday that they were considering making it available to current homeowners who purchase a new residence.
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The Democratic leaders met with the president to discuss a broad range of options to combat persistent high unemployment, officials say.
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Keeping the home-buyers credit and broadening it has been a priority for real estate agents and the home builders lobbies, and for [Senator Harry] Reid, who faces a tough re-election race next year in a state [Nevada] that has been among the hardest hit by the housing crisis since mid-2007.

Okay first off, let’s drop the nonsense notion that somehow propping up home prices will “combat persistent high unemployment.” That’s a complete non sequitur. Now, before we really talk about extending the credit for another year, let’s have a look at its effectiveness and cost this year.

In February, when the “$787 billion” stimulus plan was passed into law, the CBO estimated that the $8,000 first-time homebuyer tax credit would cost around $6.6 billion (source, source). That would have been 825,000 first-time buyers claiming the $8,000 credit. As of September, the NAR is estimating that “1.8 to 2.0 million” first-time buyers will claim the credit, with a mere 350,000 of those being sales that “would not have taken place without the credit.” That would be a total cost of about $15.2 billion. Here’s a visual of those numbers:

Estimated Cost of the 2009 $8,000 Homebuyer Tax Credit

To me, that looks like a program that has been pretty poor at actually “stimulating” people to do something, and pretty good at giving a nice fat $8,000 handout to people who were planning to buy a house anyway, at a cost well over double the original estimate.

However, apparently to organizations like NAR and NAHB, that looks like a rousing success story that should be both extended and expanded. According to Calculated Risk the NAHB is pushing to up the credit to $15,000, expand it to all homebuyers, and extend it another year. Because, you know, We The People can afford it, right? It’s not like the federal government is facing a massive budget deficit and a mind-blowingly enormous debt.

If we’re going to use the kind of anti-logic that NAR and NAHB are apparently high on, I like the plan that (ironically) was suggested by a Georgia Realtor: Let’s increase the tax credit to $100,000! Heck, why not make it permanent, and up it to $500,000, or even a cool $1 million? Apparently cost and effectiveness are not factors in this decision, we should just do whatever it takes to get those pesky homebuyers “off the fence,” right?

The constant argument that is raised in favor of extending the tax credit is that because home sales are a major driving force in our economy, stimulating the real estate market is a critical ingredient to economic recovery. Is it just me, or does that way looking at the problem seem obviously inherently flawed?

Allow me to explain by way of analogy. Let’s say I decide to quit my job as an engineer and instead get into a full-time Ponzi scheme that has me selling “business secrets” to an ever-growing pyramid of underlings, who themselves re-sell the “business secrets” to their own underlings, passing on a commission to me. Eventually the scheme collapses (as all Ponzi schemes inevitably do), and my income drops to zero. Now, I could go back and get a new engineering job again, but instead I decide to focus all my effort on figuring out ways to get people buying “business secrets” again so I can get my income back to where it was at the peak.

Sounds insane, right? Yet that is exactly what the government is attempting to do with the various “stimulus” plans directed at the real estate market.

Meanwhile, as Calculated Risk points out, “stimulating” people to move out of rentals and buy their own homes has some rather unpleasant unintended consequences:

And that means even more pressure on rents (rents are already falling). This is good news for renters, but this will also lead to more apartment defaults, higher default rates for apartment CMBS, and more losses for small and regional banks.

What I don’t understand is why aren’t major REITs that own rental units across the country (e.g. Equity Residential) lobbying congress just as hard as NAR and NAHB against extending the tax credit? You would think they would have a pretty strong interest in not defaulting on their loans due to too-low occupancy rates.

So basically what we’re looking at in the $8,000 tax credit is an inefficient, massively expensive, and quite probably economically damaging program. I can’t imagine why Congress hasn’t expanded it already.

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The Mythical Teeming Hordes of “Pent-Up Buyers”

By The Tim on October 7th, 2009 at 10:45 AM · 54 Comments

We’ve been hearing a lot of speculation recently that goes something along these lines:

There is basically this enormous teeming horde of potential home buyers out there lurking on the sidelines for no good reason. All we need to do is come up with the right concoction of incentives to get these pent-up buyers off the fence and the housing market will recover!

Here’s just one example of that kind of reasoning from an article yesterday’s Tacoma News Tribune:

According to Dick Beeson, a Windermere broker and a director of Northwest MLS, the latest numbers reflect “a lot of pent-up demand. A lot more people are realizing closed sales.”

As regular readers of these pages will recall, I do not buy the claim that there is a large mass of “pent-up demand.” In fact, I believe quite the opposite is true: that during the bubble (thanks to virtually non-existant lending standards and a mass get-rich-quick hysteria) and now post-bubble (thanks to various bailouts, tax incentives, and artificially low interest rates) a significant amount of demand has been borrowed from the future.

Let’s take a few moments to visualize the concept of borrowed demand using data on closed sales and population. Here are our working assumptions:

  • The number of closed sales in the year 2000 is a reasonable baseline for a healthy market.
  • In a normal market, closed sales will grow linearly as a function of households.
  • Household size since the 2000 Census has remained steady at 2.39 people per household.
  • For 2009, fourth quarter closed sales will come in 10% above 2008.

Based on these assumptions, here’s a view of the cumulative “borrowed demand” by year since 2000.

Cumulative Borrowed Demand

While sales in 2001 and 2002 were fairly close to what our assumptions would have predicted (slightly lower, probably due to the dot-com bubble fallout), as the housing bubble began to inflate in 2003 the number of borrowed sales started to pile up at an alarming pace, peaking at over 23,000 in 2006.

Since 2005 when closed sales peaked at 31,939 (vs. a forecast “normal” level of 24,118), the number of closed sales has dropped significantly, falling to roughly half the peak level in 2008 at 15,991. To real estate agents, these declining sales numbers indicate that there must be a building volume of “pent-up demand.” However, as the chart above demonstrates, this is merely what it looks like when the market is forced to pay back the demand that was borrowed from the future.

If sales had been allowed to continue correcting at the natural rate we were seeing in the first few months of the year, the entire borrowed demand debt would likely have been paid in full in 2009, allowing sales volumes to begin to recover to a more normal level in 2010. Instead, the market has been innundated with misguided attempts to bring out the non-existant “pent-up demand,” and the way things are shaping up right now it looks like last-ditch borrowing of future demand will leave us with a few thousand sales still to be paid back sometime in the future, likely resulting in a continued drag on demand in 2010 and 2011.

“Pent-up demand” is a myth. That’s not to say that there aren’t some legitimate potential buyers out there with the ability to purchase who are sitting on the sidelines waiting for a better market opportunity. However, they are most certainly far outnumbered by the buyers who purchased prematurely in 2003-2006 that would otherwise have waited a few years to buy once their finances were more in order.

→ 54 CommentsCategories: Features
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