$15k Tax Credit On the Chopping Block

It looks like the $15,000 homebuyer tax credit may not make it into the final “stimulus” plan after all…

From the AP:

Working to accommodate the new, lower overall limit of the bill, negotiators effectively wiped out a Senate-passed provision for a new $15,000 tax credit to defray the cost of buying a home, these officials said.

Another source, Housing Wire, confirms:

Under the finalized plan, Sen. Max Baucus (D-Mont.) has said that the $35.5 billion to provide a $15,000 homebuyer tax credit, approved in the Senate last week, would likely be cut back.

Good riddance.

Update: The Associated Press is reporting that in the final version of the “stimulus” bill, instead of a $15,000 tax credit, the repayment requirement on last year’s first-time homebuyer $7,500 tax loan is being waived from January 1 through August 31 of this year, and the amount is being upped to $8,000.

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

108 comments:

  1. 1
    Mike2 says:

    Won’t somebody PLEASE think of the Realtors???

  2. 2
    Nick says:

    Well, that’s something at least: hurray for the process removing one of the many horrible wastes in this atrocity. It feels kinda like being a condemned prisoner, set for execution, where they were planning numerous horrible tortures before you were actually killed. The “kind” executioners just came to inform you that the painful tongue-removal which they had added last week, and was scheduled before you lost all your other extremities, get disemboweled, drawn and quartered, and eventually allowed to die, has been taken off the agenda: doesn’t that make you happy? We should be happy they are allowing us to keep our tongue again, right?

  3. 3
    The Tim says:

    RE: Nick @ 2 – Wow, that’s certainly a… colorful way of looking at it.

  4. 4
    gortnerp says:

    “Senator Bill Nelson said the $15,000 credit is “likely … to be cut down to a $7,500 credit” for homes bought after Jan. 1, 2009.”

    http://www.reuters.com/article/governmentFilingsNews/idUSWAT01097420090211

  5. 5
    TheHulk says:

    Uh oh,

    I can see a mad scramble at the NAR office trying to come up with something positive they can spin after this. I am sure they had about 10 variations on how the 15K would be an immense gift from the almighty that would rescue housing. NOT!

  6. 6
    singliac says:

    I hope they get rid of it all together. The last thing we need is some artificial bottom. Although it shouldn’t matter, since according to Ardell we’ve already hit bottom. ;)

  7. 7
    Nick says:

    RE: The Tim @ 3 – I’m a taxpayer (and by that, I mean I actually pay taxes, have savings in US dollars, and am not wealthy enough to shelter my assets offshore)… how else would I feel? We’re getting bent over the proverbial barrel by the most enormous pork agenda-pushing debt-creating spending package in the history of the world, and they just told us they “might” remove one of the most egregious abuses which was only added last week as an additional slap-in-the-face to anyone not trying to get rich quick in the real-estate bubble, or dumb enough to be playing by the “rules”. Yes it’s certainly a good thing if they axe it during the “negotiation” process (composed of Democrats from both side of Congress; that’s bipartisan, right?), but it’s hard to get too happy about it, in context.

  8. 8
    gortnerp says:

    I don’t think that most home buyers will see much of a change in benefit, if the tax credit goes from $15K to $7.5K. Also, I think only the highest income earners will see much decrease in this tax credit.

    Here’s an idea for a new poll question:
    If you are a fence sitting home buyer, is your 2008 federal tax bill higher than $7,500?
    Yes?
    No?

    If most potential home buyers say, “No,” then this change has very little real effect.

    I for one, am only paying $5600 in federal taxes, so this change means little to me.

  9. 9
    SeattleMoose says:

    It was just a “feel good” gesture that would have wasted more government money.

    Now can we reverse those $97,000 congressional pay raises?

    And can we prosecute the hundreds of newly minted Merrill Lynch millionaires who sprung into existence just prior to the BofA merger….on our mis-spent bailout money?

    Paulson has probably skipped out of the country……

  10. 10
    Kary L. Krismer says:

    I actually have mixed feelings about it. Obviously it’s outrageously expensive, and the $7,500 credit did nothing (many people found out about it only after they bought). Also, it really seems like giving up to 10% back while FHA is giving 96.5% loans means FHA would be giving 106.5% loans.

    On the other hand I do think something needs to be done to help fix what might end up being an over-correction.

  11. 11
  12. 12
    patient says:

    Kary, that depends on your definition of an over-correction. The bubble premium must and will be removed. The rest should follow the economy, ie if the economy tanks an additional decrease in home values is expected and healthy. What needs to be addressed is the economy and not housing. Housing started this mess but it will not end it and to try to make it so will just evaporate tax payer money. So the economy followed housing down but housing will follow the economy up.

  13. 13
    Kary L. Krismer says:

    Okay, speed of the correction. I’m of the opinion that most markets (stock, realty, etc.) overreact both directions. I wasn’t trying to pull an Ardell and claim this should be a bottom.

    Also, on that topic, one problem with this bill is it’s national. That’s a problem because some markets may need the help and some might not, but everyone will get it.

  14. 14
    The Tim says:

    By Kary L. Krismer @ 13:

    Also, on that topic, one problem with this bill is it’s national. That’s a problem because some markets may need the help and some might not, but everyone will get it.

    Welcome to post-civil war America.

  15. 15
    patient says:

    Just as an extra clarification of my last point. In a healthy environment the economy will always lead housing,if the economy goes up housing goes up, if the economy goes down, housing goes down. The problem was that housing was put in front of the economy and drove the economy ( with hot air ) and when housing collpased the economy followed. We put the carriage in front of the horse and naturally the horse tripped, fell and broke some bones. Now it needs to heel before it can start pulling again.

  16. 16
    Mike2 says:

    By gortnerp @ 8:

    Here’s an idea for a new poll question:
    If you are a fence sitting home buyer, is your 2008 federal tax bill higher than $7,500?
    Yes?
    No?

    Won’t this apply towards 2009 taxes? It’s kind of early in the year for someone to know whether they’ll be over $7500, if you get my drift. (Assuming you haven’t already paid $7500 in taxes by the end of January!)

  17. 17
    patient says:

    You guys must be good at tax planning. My wife and I always pay more than double the $15k even with max out 401k contributions and 2 kids deductions. I must really read up on tax planning this year….

  18. 18
    Joel says:

    RE: patient @ 12
    I wouldn’t say housing started it. Housing was the most visible symptom of the true, and much larger, problem.

  19. 19
    98115_Renter says:

    RE: Nick @ 7

    I don’t have time to do my homework right now, but I’m fairly certain that tax rates for most income brackets are about as low as they have been in 50 years, perhaps more. I’m open to someone proving me wrong.

    If the stimulus winds up stemming the number of people out of work, it will eventually pay for itself in increased tax revenue when the economy recovers. It’s basically the same argument the republicans make about tax cuts, but that has been proven wrong many times. GDP growth is invariably higher with increased gov spending than with tax cuts.

  20. 20
    Chuck Ponzi says:

    98115…

    The answer to your question is no, but the question is wrong.

    Income brackets didn’t adjust with income changes (inflation). So, the lowest quartile is paying about the same or in some cases slightly higher. The second quartile is paying more. The third quartile is paying a lot more, and the fourth quartile is paying a lot less. (all as a percentage).

    It’s become so onerous that AMT now regularly hits middle-income workers. The question is whether the quartiles are still contribution a similar blended rate of taxes as 50 years ago. That they most certainly are not.

  21. 21
    Nick says:

    RE: 98115_Renter @ 19 – I’m not sure how much I can disagree with your statements (without qualifications), but let me try:

    If the stimulus replaces private-sector jobs with public jobs, it’s a negative for the economy. The government paying people to work is a net negative proposition: the tax revenue is neutral, the non-taxed income has to be sucked from the economy in the form of taxes and fees, and benefits are extra public expenses. The only case where it’s not immediately negative is if the government monetizes the cost (as the Fed is doing), in which case it shows up as devaluation of the currency, which is impending in a big way. GDP is higher with government spending, but only because GDP includes government spending, which is ridiculous as a measure of economic health; GDP minus government spending is a much more accurate metric.

    Marginal tax rates are low, but not the lowest; however, this is very misleading. The average tax rate paid is a combination of the bracket rates, and how much of the tax law is slanted toward deductions and exemptions rather than “normal” taxes. For example, in the 70’s the marginal high-end rate was ~90%, but people paid about the same percentage in total taxes, due to the enormous amount of deductions, exemptions, and loopholes built-in. The tax code is more “fair” today, but taxes are by no means lower, despite the lower marginal rate.

    Creating private-sector jobs is the way to get the real economy going again; I think everyone is in agreement on that point. From there, it’s just a question of applying the litmus test to the specific proposals in the pork spending plan, and applying a tiny amount of rational thought. For example, the creation of a government bureaucracy and overseer to tell doctors what procedures they are and are not allowed to perform, based on whatever Congress thinks is medically appropriate in response to a generic condition. This is an element of the plan, and there’s nobody who could explain with a shred of credibility how this would create private-sector jobs. That’s just an example of how bad this idiotic waste of pork agenda-pushing pile of crap is.

  22. 22
    Cris says:

    Tax break for home buyers out of stimulus bill
    by Michigan Business Review
    Wednesday February 11, 2009, 2:12 PM
    A tax credit that many in the housing industry were hoping would boost the sagging market has apparently been stripped out of the federal stimulus bill.

    The Associated Press is reporting that the proposed $15,000 credit for new home purchases has been removed from the bill in an effort to reduce its cost.

    Many industry groups had said the incentive would be a strong boon to the housing market. Some realtors reported that potential buyers were waiting to see whether the credit went through before closing.

    It had been seen as a more effective measure than the $7,500 credit enacted last year, which is required to be paid back in subsequent tax years. The $15,000 credit would not have had to be paid back, and would have been effective for one year after the bill was enacted.

    The AP reported that congressional negotiators hoped to announced a tentative deal on the bill by Wednesday afternoon.

    http://www.mlive.com/business/ann-arbor/index.ssf/2009/02/tax_break_for_home_buyers_out.html

  23. 23
    98115_Renter says:

    RE: Nick @ 21

    Well, regardless of federal tax rates I think Washingtonians have very little to complain about where taxes are concerned, especially if they are not paying property tax. We live in one of the most income tax advantaged states in the country.

    As someone who has worked both in a federal position in the past and a public corporation currently, I can say that both positions had their merits, were beneficial to society, and both paid me a wage that contributed to the broader economy. People think of increased government employment as pork, but those positions fill vital societal needs, and they provide employment. The movement towards contracting out federal government jobs has been a huge waste of taxpayer dollars IMO.

    Unfortunately the congressional Dems have given the repubs lots of ammunition to cherry pick their grievances out of the stimulus bill and thus broad stroke the entire thing as pork. But cynicism aside, it will create useful jobs where tax cuts will not realistically encourage the private sector to increase hiring or decrease layoffs.

  24. 24
    Scotsman says:

    I guess they figured that with the falling cost of housing and falling wages, $7500 would be more than enough.

    But why rely on a tax credit at all? I’m just going to wait for Obama to do a rally in Seattle, then ask him to give me a house. In the new socialist order, I figure that it’s my right to have a house given to me. After all, I’m pretty sure I’ve suffered in the past, and Scots are a minority…..

  25. 25
    CCG says:

    Don’t worry, there’s other good news to replace it:

    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a99q040j_dUI

    ” Feb. 11 (Bloomberg) — Fannie Mae, the mortgage-finance company under U.S. government control, will no longer bar real- estate investors from qualifying for its loans if they already own four properties as it seeks to spur housing demand.

    The company will expand its limit for investor and second- home loans to as many as 10 properties per borrower, according to a Feb. 6 notice to lenders on Washington-based Fannie’s Web site. “

  26. 26
    98115_Renter says:

    RE: Scotsman @ 24

    Sorry Scottsman, all societal benefits were already given away to the rich during the Bush Administration, there is nothing left for you.

  27. 27
    David McManus says:

    By 98115_Renter @ 26:

    RE: Scotsman @ 24

    Sorry Scottsman, all societal benefits were already given away to the rich during the Bush Administration, there is nothing left for you.

    So only the rich got tax cuts?

  28. 28
    David McManus says:

    Stimulus Q&A.

    Wow. A whopping $13 a week. That’s going to get the economy moving again.


    Q: What are some of the tax breaks in the bill?

    A: It includes Obama’s signature “Making Work Pay” tax credit for 95 percent of workers, though negotiators agreed to trim the credit to $400 a year instead of $500 — or $800 for married couples, cut from Obama’s original proposal of $1,000. It would begin showing up in most workers’ paychecks in June as an extra $13 a week in take-home pay, falling to about $8 a week next January. ”

    http://news.yahoo.com/s/ap/20090211/ap_on_bi_ge/meltdown101_stimulus_plan_2

  29. 29
    Kary L. Krismer says:

    RE: CCG @ 25 – That news about investor refinancing has been out for a couple of days.

    On the stimulus bill, I’m afraid I don’t recall the rules of the Senate. Is the 60 vote filibuster thing only on the initial consideration of the bill? If so, that seems sort of odd in that you could get three Republicans to vote for it, then take it to conference and take out all the things that got them to vote for it.

  30. 30
    Dave says:

    Remember — horses with broken legs don’t “heal” — they shoot ’em!

  31. 31
    Cris says:

    $15k tax cut would mean a few hundred dollars extra net monthly in pocket.. Would that seriously make people buy overpriced houses? It’s better senate didn’t pass that and now we can wait more falls in house prices..

    Sorry sellers- that was a short dream for you.

  32. 32
    98115_Renter says:

    RE: David McManus @ 27

    On total dollars, they received more by far, especially when you include the capital gains tax cuts. If you are a multi-millionaire or billionaire and live solely off of long-term gains, you have a lower tax rate than most middle class Americans.

    But, I was sarcastically referring to everything, not just taxes.

    For the most part I am only rebutting the large number of pro-republican policy posts on here, not instigating anything myself.

  33. 33
    WestSideBilly says:

    By gortnerp @ 8:

    Here’s an idea for a new poll question:
    If you are a fence sitting home buyer, is your 2008 federal tax bill higher than $7,500?
    Yes?
    No?

    If most potential home buyers say, “No,” then this change has very little real effect.

    I for one, am only paying $5600 in federal taxes, so this change means little to me.

    Any SINK/DINK looking at buying a house should be paying a lot more than $7500 in income taxes.

  34. 34
    David McManus says:

    RE: 98115_Renter @ 32

    Well, the bottom 50% of earners only pay 4% of the total taxes in this country, so don’t you think it’s FAIR that the top 50% get a larger tax cut?

  35. 35
    David McManus says:

    For the most part I am only rebutting the large number of pro-republican policy posts on here, not instigating anything myself.

    Gee, I didn’t know that this was a liberals only blog.

  36. 36
    98115_Renter says:

    RE: David McManus @ 34

    Nope.

    But anyway, we should really be talking about the $15k housing credit, and I for one am happy that is gone.

  37. 37
    98115_Renter says:

    RE: David McManus @ 35
    The repubs lost for a reason. Time to try something new. If you think things are worse off in 4 years, then you might have some ground to stand on.

  38. 38
    MacAttack says:

    “It’s become so onerous that AMT now regularly hits middle-income workers.”

    Eh? It doesn’t hit my wife and I, with household income of $130K pretax.
    What are WE? Chopped liver?
    I don’t buy all that AMT crying. Our household income HAS to be in the top 10%, and WE’re not affected by AMT. So I’m afraid I lack any sympathy.

  39. 39
    David McManus says:

    RE: 98115_Renter @ 37

    Don’t worry, it will be. But that will all be Bush’s fault, so no worries.

  40. 40
    David McManus says:

    Oh, and here’s my source. The ultra conservative IRS web site.

    http://www.irs.gov/pub/irs-soi/06in03etr.xls

  41. 41
    mukoh says:

    LOL $130k in the top 10%. Mac you crack me up.

  42. 42
    EconE says:

    Tim…pardon me for being a shmuck…but the AP quote…

    Working to accommodate the new, lower overall limit of the bill, negotiators effectively wiped out a Senate-passed provision for a new $15,000 tax credit to defray the cost of buying a home, these officials said.

    could be something like…

    Working to accommodate the new, lower overall limit of the first of many bills, negotiators effectively postponed a Senate-passed provision for a new $15,000 tax credit to defray the cost of buying a home in states such as Iowa, Kansas and Missouri, these officials said.

    I’m guessing something bigger and uglier will rear it’s head in either TARP/Stimulus I, II, III, or IV….or it will be so huge that it will be part of the ‘STIMULUS III IN 3-D!!!’ package.

    After all…who doesn’t like 3-D?

  43. 43
    The Tim says:

    RE: EconE @ 42 – You’re probably right.

  44. 44

    RE: Kary L. Krismer @ 29

    Congress gets to vote again on the amended bill. They still need 60 votes.

  45. 45
    Jonness says:

    I’m absolutely ticked off at you guys and want an apology! I was counting on you paying for my downpayment. You tightwad misers. I need a new house. Now fork out the money so I can get in over my head and lose it all 6 months from now. :)

  46. 46
    DaveyDave says:

    There’s an interesting/entertaining interview with John Talbott, author of Contagion at this link. He’s predicting a real estate value rollback to 1997 prices.
    http://www.bloomberg.com/apps/news?pid=20601088&sid=ahOc6ZN_3HE0&refer=home

    Here are a couple quotes:

    Pressley: One real-estate broker reminds you that housing slumps don’t last forever.

    Talbott: When I wrote my first book on housing in 2003, I heard from almost every real-estate broker in the country. They all insisted that housing booms do last forever!

    And this:

    Pressley: You predict homeowners will lose $8 trillion to $10 trillion. How so?

    Talbott: There was at the 2006 peak about $25 trillion of residential home value. Today, that’s off almost 25 percent. That takes it down to the $18 trillion range, which is a $7 trillion loss. But in a deep recession, home prices might trade even lower than fair value given the high unemployment that exists.

  47. 47
    Fripp says:

    We did the open house rounds this weekend and every agent mentioned the tax credit. We heard about it from four agents and none of them described it accurately (as it was currently in the Senate version of the bill). In fact, most of them described it in a way that made it worse than it actually was (two described it as a tax deduction instead of a credit, one went so far as to say it was a dollar for dollar offset of your adjusted gross income). Another actually told us it was the state of Washington working on doubling the current $7,500 income tax credit. I’m still not sure how a state with no income tax would accomplish this.

    I’ll have to head out again this weekend and see what they have to say about the new and improved version.

  48. 48
    jon says:

    From the House Financial Services Committee hearing minutes

    Rep. Joe Baca (D-CA-43) asked the following question:

    How do you feel about the bailout? Do you feel that the bailout was necessary?

    Lloyd Blankfein, CEO, Goldman Sachs:

    I don’t necessarily think it was necessary at the time…

    Ken Lewis, CEO, Bank of America:

    I actually agree. I know at the time we did not feel like we needed the 15 billion.

    http://www.congressmatters.com/storyonly/2009/2/11/14197/9810/405/614

  49. 49
    gortnerp says:

    RE: WestSideBilly @ 33

    “Any SINK/DINK looking at buying a house should be paying a lot more than $7500 in income taxes. ”

    WSB, are you crazy, or naive? I, for one, have a ton of cash saved for a downpayment, no debt, great credit, and a pre-approval for a large loan. I still don’t get up to the $7,5000 limit. Are you saying that neither I, nor “any SINK/DINK,” should buy a home? Is home ownership reserved for the super-rich only? Please be careful when making blanket statements.

  50. 50
    Scotsman says:

    And when I get my free house, I want to be able to HELOC out the full value so I can take a hard earned vacation and buy some new cars. When I get behind on those payments, I want Barrry-O to personally renegotiate the whole thing, and apologize for putting me in such a bind. It’s gonna take free medical to help me handle all the stress from the whole situation. And then I’m gonna go on CNBC and tell Chrissy Mathews how evil the politicians are, because they SET ME UP to fail!! And he’ll tell me it’s all Bush’s fault..

    I know Rachel Maddow is gay, but do you think she’ll kiss me to make me feel better? If she doesn’t, I’m going to sue, because I HAVE RIGHTS TOO!

  51. 51
    Mikal says:

    RE: Scotsman @ 50 – You have zero say. Bush borrowed $800 billion a year over eight years and you liked what he was doing. He expanded government over 15% every year over the last eight years in the name of security. Anyone that was for Bush in any way shape or form would have to be for more borrowed money to fund anything. That is what you backed the last eight years. What is different now?

  52. 52
    Herman says:

    I, for one, am not going to buy anything until the government decides how much free money it will give me for doing so.

    I’ve been teased with tax credits, 4% mortgages, and outright checks in the mail. I’m going to hold out for the best deal. If they want my money back in the system, they’re going to have to pay me for it.

    My family’s share of this $838B porkout is about $8,000. I have to find a way to get at least that much back as my share.

    PS this country sucks

  53. 53
    Joel says:

    Democrats are outdoing Bush rather than undoing him. Campaign promises = broken.

  54. 54
    Mikal says:

    We will see. Obama is trying to channel Lincoln. Lincoln’s largest funding other than the Civil War was the transcontinental railroad. Time will tell. I’m a moderate Republican that is hoping that our country will do well regardless of President.

  55. 55
    98115_Renter says:

    Isn’t it great how in times of crisis we turn to backstabbing and finger pointing instead of coming together to find a solution? There’s so much community spirit in this forum it makes me ill.

  56. 56
    Scotsman says:

    Mikal- who says I agreed with Bush’s spending?

    But Barry-O is DA MAN! He’s making Boosh look like a piker! What’s $800B a year when DA MAN can spend 3-4 times that in his first Quarter?! And I have a feeling he’s just getting started, ’cause there aren’t any problems that can’t be solved by taking money from the rich and throwing it at the poor…. well, OK, at least throwing it back to YOUR rich friends (contributors), instead of the evil rich friends of the other guy.

    By the way, just to make sure we all understand, every problem that comes up in the next two decades is Boosh’s fault! Whew, aren’t we glad we at least got that resolved!

    H*ll, I want a new corvette too- that’s my tax money going to Brazil to build GM factories, I should at least get a vette out of the deal… And one of those new Volt thingys for my kids- we want to be green, and all.

  57. 57
    Mikal says:

    RE: 98115_Renter @ 55 – No, there is a large group of small people cheering the unemployment news in the hope that with the drop in values they may one day be able to afford a house on Queen Anne for under $100,000. Most don’t seem to realize that they won’t still have a job at that point, but they can’t quite see that far.

  58. 58
    Scotsman says:

    Dang, this woman beat me to it. Now this is the Amerikan way… but you got to be quick to get your suit in first!

    http://www.foxnews.com/story/0,2933,491304,00.html

  59. 59
    BrianL says:

    Last time I looked, the $7,500 was a tax credit was.. a credit. As it isn’t a deduction so the amount you owe isn’t relevent. The amount you make is only relevent in that the if you make more than a set amount, it doesn’t apply to you.

    http://www.bargaineering.com/articles/7500-first-time-homebuyer-tax-credit.html

    Yes, it is really a loan that you pay back, etc. Just trying to make sure we have our facts straight.

  60. 60
    what goes up must come down says:

    Scotsman so basically you have said NOTHING of importance. For some reason you think this is political blog. As your link highlights you get your news from Fox so let me guess you voted for Georgie boy twice, and are still fuming that McOld and Prayin didn’t get in — Dude move on.

  61. 61
    economist says:

    On the other hand I do think something needs to be done to help fix what might end up being an over-correction.

    Housing is not over-corrected unless and until buying is significantly cheaper than renting. How many of us have forgotten that it is normal for buying to be somewhat cheaper than renting. Especially with historically low interest rates as we have today.

    Some of the real disaster areas look like they may be getting there, but obviously Seattle isn’t even close.

  62. 62
    Kary L. Krismer says:

    By economist @ 60:

    How many of us have forgotten that it is normal for buying to be somewhat cheaper than renting..

    That would be an abnormal situation, and I don’t recall a time that has ever been the case in my lifetime.

    Why would buying ever be cheaper when there’s a potential upside to buying, and when historically that upside has occurred? That would be like a convertible bond being priced cheaper than a normal bond, where all the other terms of the bond were the same.

    If buying were cheaper than renting, then most the people buying houses would rent them out for more than what they were paying, take the depreciation expense on their taxes, and profit greatly, driving up the price of houses. It would be a very temporary condition.

  63. 63
    Sniglet says:

    That would be an abnormal situation, and I don’t recall a time that has ever been the case in my lifetime.

    Therein lies the reason we are in such a dire economic straights. The real-estate market has been abnormal for some 40 to 60 years, appreciating at rates that defy historical precedent. When you look at the long term real-estate charts (going back hundreds of years) it is more typical to see 0% apprecation.

    This depression is going to reset everyone’s expectations of real-estate, and the economy, back to historical norms (i.e. pre WW II).

  64. 64

    ” How many of us have forgotten that it is normal for buying to be somewhat cheaper than renting..

    That would be an abnormal situation, and I don’t recall a time that has ever been the case in my lifetime.”

    I also don’t remember a time where mortgage payments have been lower than rents, and I’m old( and a former landlord), but I do remember a much smaller discrepancy between the two. It’s true of both commercial and residential real estate…that in the past rents would practically cover mortgage payments, making it much more appealing to buy a home and then renting it out, and I think that was the norm for a very long time, and I expect the large gap that currently exists will narrow, either with higher rents, lower home prices, or a combination of both
    There is a long term historical ratio, and we’re not close to it..

  65. 65
    Sniglet says:

    I expect the large gap that currently exists will narrow, either with higher rents, lower home prices, or a combination of both

    Well, since rents are falling it would seem that home prices will have to come down a great deal.

  66. 66
    Mikal says:

    RE: Sniglet @ 62 – You are out of your mind. And please, spare me a podcast.

  67. 67
    Sniglet says:

    You are out of your mind.

    In what regard do you think I am off base? In thinking that rental rates are falling? My general expectation of a major decline in asset prices?

  68. 68
    Mikal says:

    RE: Sniglet @ 66 – Considering that asset prices pre WWII are more realistic that the last nearly seventy years. Believing that must mean you also know who shot Kennedy.

  69. 69
    Sniglet says:

    Considering that asset prices pre WWII are more realistic that the last nearly seventy years.

    I am not the only one who believes that the normal appreciation rate for real-estate is 0%.

    Question: So how rich can you get on real estate?

    Answer: From 1890 through 1990, the return on residential real estate was just about zero after inflation.

    http://money.cnn.com/2007/04/09/real_estate/shiller.moneymag/index.htm

    I am proud to be in the same group of nutters as Schiller.

  70. 70

    “Well, since rents are falling it would seem that home prices will have to come down a great deal. ”

    Maybe. But what is going on at this moment may or may not continue for an extended period. An example is when home prices were escalating, many people believed that the party wouldn’t stop, that home prices would keep going up.
    Right now rents and home prices are both falling. Is this going to continue indefinitely? My guess is that Sniglet says yes. My inclination is no.

  71. 71
    cheapseats says:

    “Anyone that was for Bush in any way shape or form would have to be for more borrowed money to fund anything. That is what you backed the last eight years. What is different now?”

    I am not arguing for any of Bush’s spending policies, but it appears to be faulty logic to me, that if someone supported overspending on defense (Bush) then they must support overspending by the next guy regardless of what it is for?

    I am a republican that supported Obama. I do want change, a large part of the change that I wanted was fiscal responsibility. Fiscal responsibility at the government and personal level.

  72. 72
    Kary L. Krismer says:

    By Sniglet @ 62:

    Therein lies the reason we are in such a dire economic straights. The real-estate market has been abnormal for some 40 to 60 years, appreciating at rates that defy historical precedent. When you look at the long term real-estate charts (going back hundreds of years) it is more typical to see 0% apprecation.

    And to that I’d refer to the discussion of the increase in the number of two earner households.

    I’d agree if we go though a significant depression, that will affect peoples’ spending patterns going forward. I have a hard time believing that we’re there just yet, however. If and when credit becomes available to the average American to the extent it was available before, I fully expect irresponsible spending to pick up again. ;-)

  73. 73
    Kary L. Krismer says:

    RE: Sniglet @ 68 – The problem with Shiller’s analysis is it fails to account for the increased supply of property as people move out to wider and wider areas. If you go back to 1890, Woodinville to Seattle would be a day trip.

    Also, even assuming it was zero percent after accounting for inflation, for most it would have been a fantastic investment, because probably less than 10% of the properties were owned free and clear. Most of the money made on real estate is made due to leverage.

  74. 74
    Angie says:

    Re: the AMT discussion that’s been a sideline to this conversation–I too take issue with the idea that the AMT hits “middle income” taxpayers. If someone has a cite otherwise, with hard numbers, I’d like to see it.

    My recollection is that the median adjusted gross income is $42K and $90K is the 90th percentile of AGIs. This covers all returns, single and married, children or no. I seriously, seriously doubt that the Alternative Minimum Tax affects many people if at all below $90K. The idea that it’s biting a lot of people at the $42K level, which is the literal definition of “middle income”, is very hard to swallow.

  75. 75
    Sniglet says:

    Also, even assuming it was zero percent after accounting for inflation, for most it would have been a fantastic investment,

    This is a key point. Post WWII we have had an unprecedented period of inflation. Consequently, few alive have any experience with what occurs when deflation is the order of the day. All that leverage only leads to disaster in times of deflation (i.e. which is what I believe we are going to be experiencing for the next 5 to 10 years at least).

  76. 76
    Tyler says:

    RE: Kary L. Krismer @ 61

    That reminds me of the beginning of the bubble!

  77. 77
    darth_z says:

    Talking about rent vs. buy, I agree that in a normal environment, the cost of renting is always somewhat higher than buying. – otherwise, nobody would want to be a landlord unless they are either speculator (counting on price appreciation) or philanthropist (subsidizing renters out of charity).

    There is an interesting recent paper from the Fed: Effective Practices in Crisis Resolution

    http://www.calculatedriskblog.com/2009/02/fed-paper-effective-practices-in-crisis.html

    being discussed in Calculated Risk. Based on the data collected from the Swedish housing bubble, it is interesting to see that eventually, the Price-to-Rent ratio went back to normal, which is slightly below 1, meaning it is cheaper to buy then to rent.

    Conclusion – The market will bottom when the price-to-rent ratio is back to normal – It will always be the case – no matter how bullish or hopeful or dreaming or dilusional you are… It’s just the law of economics.

  78. 78
    economist says:

    . Post WWII we have had an unprecedented period of inflation

    More to the point, we had an unprecedented increase in real household income due to both rising real wages and rising female workforce participation. That’s what drove the increase in house prices before the bubble.

    Real household income has nowhere to go but down. That is the one and only long term support for house prices. And if you think consumer price inflation will support nominal house prices, wages are not going to track consumer price inflation in a time of recession.

  79. 79
    Cris says:

    Buying is always more expensive than renting in a declining market. Only the ignorrants can claim the opposite.

    RENT: flat rent fee much less than mortage price
    No tax return – so what? you spend much less cash of yours, you will not bother looking for a huge tax return.. Your cash money is yours..

    BUY: Huge mortgage due to overpriced houses, initial 6% loss to agents, house price keeps declining, you pay property tax which is surely not small amount, Home owner dues, maintannace, repairs etc etc..
    Tax return – comparing to what you pay in cash to house and government for taxes, your return is truely negligible..

    Just RENT now. You should NOT buy a house in a declining market or you will lose buch of dollars no matter wht………

  80. 80
    patient says:

    Looks like the new bill includes this:

    “Those eligible for this credit must have purchased a home after Jan. 1, 2009, and before Dec. 1, 2009.”

    And that it is down to $8k. Even the dumb will probably figure out that they have time to see how prices developes before deciding if they want to “take advantage” of the credit. By 4th quarter when decision time comes it will be obvious that $8k is not even a fraction of what they gain by waiting. For the ones that “have to” buy it’s a free gift that wasn’t a deciding factor, aka a total waste of tax payer money.

  81. 81
    Kary L. Krismer says:

    RE: patient @ 80

    Or it could be that they’ll do very well–the same as any other time buying anything–it’s risky. Look at people who bought stock X when it was falling dramatically, only to earn 100% in a short period of time. The worst appearing times are often the best. I continue to believe timing the market isn’t the best strategy, but at the same time I do think the next couple of months will be down. But that’s based on pendings, and 4 of the last 13 months or so that indicator was wrong (and once it was correct to the penny).

    What I like about the new credit and the old one is that is isn’t something that gets a first time home buyer into being able to buy. It’s something that replenishes their accounts of those that can buy after they buy. There are many first time home buyer programs still in existence (but crippled) that are much worse in that regard. Even during the boom years I questioned whether those programs were doing them a favor.

  82. 82
    Mikal says:

    Am I wrong to think that stocks do as well as housing as an investment historically? Granted I have had a few beers, but Sniglet made me think about stocks worth longterm and how they gain when compared to inflation. Maybe I pulled the wrong chart. It seems that the gains follow inflation almost verbatim. You have to time it right to make real money. What give? And please, I don’t want a podcast.

  83. 83
    Hugh Dominic says:

    RE: what goes up must come down @ 60
    thanks for saying what I was thinking – “move on”

  84. 84

    “Am I wrong to think that stocks do as well as housing as an investment historically?”

    I think that over the long haul, stocks have done a little better than housing.
    but…it’s entirely possible to lose money in both a rising stock market and rising housing market, and it’s also possible ( but far less likely) to make money in a falling stock market and falling housing market.)
    My personal experience doesn’t bear that out. I’ve made more money investing in housing, but I have far less self control when it comes to stocks, and usually end up buying the right stock at the wrong time, growing impatient too quickly or hanging on too long.

  85. 85
    Kary L. Krismer says:

    One other difference. All you’re doing is comparing purchase price to sales price over a period of time. Stocks have dividends and home ownership has the right to live in the house or say someone else can live in the house for money (or other things of value). Not all stocks pay meaningful dividends, but I guess there are also places where the right to rent out or live in a home isn’t terribly valuable.

  86. 86
    patient says:

    It is my firm belief that timing stocks is far more difficult than timing housing. Stocks are truly volatile and can easily move 30% up or down in the matters of hours. The stock market as a whole can move a couple of percent a day. Housing doesn’t do that. It moves slowly and changes direction infrequently. I think the risk of buying a home in a down market is much higher and the loss much more predictable than if you buy a stock. Stocks also have cheaper holding costs and are very easy to trade. You know more or less on the minute when you can unload or purchase them housing is a different animal all together. Stocks are also seldom bought with borrowed money.

    If you buy a home after you see a lasting trend of recovery you will do much better
    than if you buy when prices are consistently and sharply (for housing ) down. Time is on your side.

  87. 87
    Kary L. Krismer says:

    RE: patient @ 86 – I’d say exactly the opposite. Stocks have support and resistance levels, where real estate has no similar concepts. Stocks are also very liquid, making it easier to time. If you own a house it might take you six or more months to sell, where with a stock you can usually pick the exact minute to sell. Finally, real estate has more seasonal variation than stocks. For example in 2008 the median for King County SFT rose from $428,500 in December, 2007 (or $429,950 in March, 2008) to $449,000 in May, 2008. There were a number of people that took that to mean $428,500 was the bottom.

  88. 88
    patient says:

    To sum it up: Housing is comparatively easy to predict and time. Naturally agent don’t want to hear that and rather spread the notion that you can’t predict so you can just as well buy now since they want a steady income in down markets as well. Due to that I also think housing is a safer investment if you buy when rents vs prices are at or below the historic norm AND prices are flat or raising for an extended period.

  89. 89
    Kary L. Krismer says:

    By patient @ 88:

    To sum it up: Housing is comparatively easy to predict and time.

    Yep, that explains why so many people turned from bullish to bearish in July, 2007. ;-)

  90. 90

    Most people see the differences between stocks and real estate, and of course there are differences, but there are also similarities.
    In both real estate and stocks, there are “rules” that if you follow, you will make money. The problem is that these rules work until they don’t. A year or two ago GE looked like a sure bet as a stock investment, and now it’s price is less than half of what it was then. And despite claims that you can predict the housing market based on falling inventory, or increasing sales, or rent to purchase ratio at some point that too won’t work, and there will be new “surefire” strategies that people will insist will always work.

  91. 91
    patient says:

    “Yep, that explains why so many people turned from bullish to bearish in July, 2007. ;-) ”

    No, that it did not happen in large scale is explained by the brainwash that real estate always goes up and the media propaganda that favours the real estate industry. It takes a while for people not so involved in the market to understand what is going on. Many others did and do understand but think they are better served by pretending that they do not.

  92. 92
    explorer says:

    Back on topic: The tax credit only matters if you have that much, or whatever portion owed in taxes remaining, after your ALREADY available standard deduction or other itemized interest. Even then since it’s a credit, it’s not dollar for dollar. Usually, it’s about 25 cents on the dollar owed.

    I never thought credits where all they were promoted to be, and few in practice would find it would stimulate their “buy now or be priced out forever,’ hormones to make them stampede the market.

    Just remove it entirely and use it for the infrastructure and job creation that really needs the resources.

  93. 93
    BrianL says:

    explorer, do you have a reference on that? What I’ve read suggested that, since this was a credit, the amount owed wasn’t relevant.

  94. 94
    Kary L. Krismer says:

    By explorer @ 92:

    Back on topic: The tax credit only matters if you have that much, or whatever portion owed in taxes remaining, after your ALREADY available standard deduction or other itemized interest. Even then since it’s a credit, it’s not dollar for dollar. Usually, it’s about 25 cents on the dollar owed. .

    A credit is dollar for dollar. A deduction might get you 25 cents on the dollar, depending on your tax rate.

    As to BrianL’s question, I don’t know the answer on the $8,000 credit. On the $7,500 that needed to be repaid you didn’t have to owe anything to get the $7,500. On the $15,000 you had to owe money, but you could carry over to a second year if you didn’t use all the $15,000 up.

  95. 95
    don't get it says:

    By Kary L. Krismer @ 73:

    RE: Sniglet @ 68 Also, even assuming it was zero percent after accounting for inflation, for most it would have been a fantastic investment, because probably less than 10% of the properties were owned free and clear. Most of the money made on real estate is made due to leverage.

    I’m rather stupid, so please explain this to me…how can you make money borrowing at, say, 5% on a mortgage when the return is zero percent? If you’re going to make money using leverage, isn’t the idea that the return is greater than the interest?

  96. 96
    Kary L. Krismer says:

    It’s the return when selling. Leverage refers to using debt to buy something. If that something goes up you earn incredible returns on investment. If it goes down, you’re in deep trouble (unless perhaps non-recourse).

    If you buy a $300,000 house with a $300,000 mortgage, if inflation is 7% a year, that house will be worth almost $600,000 in ten years, but you’ll still only owe $300,000. The interest on the loan would be $180,000 assuming a 6% rate, so ignoring a lot of things (being able to live in the house, interest deductions, maintenance expenses, etc.) you’d be up about $120,000 on an investment of closing costs.

    For several years investments in multi-family housing has basically assumed that the prices would continue to rise, because otherwise they didn’t pencil out at all.

  97. 97
    EconE says:

    RE: Kary L. Krismer @ 96

    The house over your head shouldn’t be looked at as an “investment” in that way. Why? Because after you sell, the profit is usually plowed right back into another house that has “appreciated” at a comparable rate.

    Zero sum gain…unless you take the money and move to Missouri (or some such state).

    OTOH. If you have an “extra” property that you can “cash out of”, and not affect your own personal living situation…that would be different.

  98. 98
    patient says:

    “If you buy a $300,000 house with a $300,000 mortgage, if inflation is 7% a year, that house will be worth almost $600,000 in ten years, but you’ll still only owe $300,000.”

    Another wide spread misconception spread by the real estate industry is that this is actually profit on your investment. It’s not unusual that this $300k is borrowed money. If you pay 7% interest on that $300k what is actually your profit? That’s right, a big fat zero. Housing is a lousy investment if you use borrowed money.

  99. 99
    Kary L. Krismer says:

    RE: EconE @ 97 – I used to say things exactly like that, so I wouldn’t entirely disagree. But back when I said that I would add that people do move or downsize when they retire. Unfortunately, that’s not working out so well for people retiring in 2008 and 2009.

  100. 100
    Kary L. Krismer says:

    By patient @ 98:

    “If you buy a $300,000 house with a $300,000 mortgage, if inflation is 7% a year, that house will be worth almost $600,000 in ten years, but youâ��ll still only owe $300,000.”

    Another wide spread misconception spread by the real estate industry is that this is actually profit on your investment. It’s not unusual that this $300k is borrowed money. If you pay 7% interest on that $300k what is actually your profit? That’s right, a big fat zero. Housing is a lousy investment if you use borrowed money.

    In my example I used 6 for the loan interest rate and 7 for the inflation rate. In addition to ignoring the fact that part of the loan interest is deductible, you’re ignoring the fact that the 7% compounds. That’s why you get to 100% appreciation in only 10 years. So the first year your $300,000 house would go up $21,000, and the second year it would go up roughly $22,500, etc. But your $18,000 in interest wouldn’t change, and maybe $8000 of that would be deductible. So even if the interest rate and inflation were equal, you’d still be better off.

    Oh, and assuming you were a wage earner, your earnings would presumably go up with inflation, so the interest you were paying would be worth less and less in nominal dollars.

    I don’t want to use the multifamily market of a couple of years ago as an example of people that knew what they were doing, but what they were basically doing was assuming future inflation. They had to be because otherwise the prices made no sense. If they put too much money down, they’d have been better off putting that money in a bank, even with their assumptions as to inflation. It was crazy.

  101. 101
    patient says:

    Kary, how often is inflation higher than interest rates? Never. Interest rates is set from the inflation expectations. Show me a stretch of years where interest rates have been lower than inflation and we can talk.

  102. 102
    patient says:

    Oh yes, the tax deductible, good that we get that on too. Another misconception. The advantage is the additional deduction from what the standard deduction would give you. For a family of four my guess is that it’s pocket change.

  103. 103
    Kary L. Krismer says:

    By patient @ 101:

    Kary, how often is inflation higher than interest rates? Never. Interest rates is set from the inflation expectations. Show me a stretch of years where interest rates have been lower than inflation and we can talk.

    Inflation fluctuates, interest rates are set when you get the loan, unless it’s an ARM. There were a lot of people in the late 70s early 80s who had interest rates far below the rate of inflation.

    As to your next comment, I accounted for that, saying that only 8k of the 18k would be deductible. That’s one of my pet peeves for mortgage people–who don’t mention that when they’re making their sales pitch.

  104. 104
    don't get it says:

    By Kary L. Krismer @ 96:

    It’s the return when selling. Leverage refers to using debt to buy something. If that something goes up you earn incredible returns on investment. If it goes down, you’re in deep trouble (unless perhaps non-recourse).

    If you buy a $300,000 house with a $300,000 mortgage, if inflation is 7% a year, that house will be worth almost $600,000 in ten years, but you’ll still only owe $300,000. The interest on the loan would be $180,000 assuming a 6% rate, so ignoring a lot of things (being able to live in the house, interest deductions, maintenance expenses, etc.) you’d be up about $120,000 on an investment of closing costs.

    For several years investments in multi-family housing has basically assumed that the prices would continue to rise, because otherwise they didn’t pencil out at all.

    With only a 1% differential between the inflation rate and the mortgage interest rate, are you still netting a positive return after taking into account maintenance and property taxes?

  105. 105
    patient says:

    “only 8k of the 18k would be deductible” which makes the actual saving something like 18% of 8k = $1500. $1500 on $300k is 0.5%. So if the inflation is 0.5% lower than your interest rate you break even, if it’s inflation is lower than interest rate + 0.5% you loose. Wanna bet that inflation will be lower than interest rates + 0.5% the next couple of years? We’re ;ikely to have deflation so interest rates needs to go to 0.5% or lower. Not going to happen.

  106. 106
    Kary L. Krismer says:

    RE: don’t get it @ 104 – 1% would be roughly the property tax. But in the hypothetical, it would total about $40-50k (estimate), so that wouldn’t eat up all your profit. Maintenance probably wouldn’t either, but it depends on what you assume it to be!

  107. 107
    Kary L. Krismer says:

    By patient @ 105:

    Wanna bet that inflation will be lower than interest rates + 0.5% the next couple of years?

    Interest rates at any given time would be more than inflation, but with either very low inflation (or deflation) or very high inflation I think you’ll see a larger differential. Right now it wouldn’t surprise me if we’re somewhere in the 5-7% range–I believe the last CPI numbers were negative YOY.

  108. 108
    cheapseats says:

    It appears that the $8k is a full refund that you do not have to repay…

    http://money.cnn.com/2009/02/13/real_estate/homebuyer_tax_credit_finalized/index.htm

    “A big plus is that the credit is refundable, meaning tax filers see a refund of the full $8,000 even if their total tax bill – the amount of witholding they paid during the year plus anything extra they had to pony up when they filed their returns – was less than that amount. “

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