My son recently purchased his first home. After making his downpayment, the US government gave him an extra $3000 (the $8000 tax credit less his $5000 down payment) in cash that he used for fix up expenses and a washer and dryer.
However because of this tax credit he made offers on about 12 different houses all of which were bid up by other $8000 eligible buyers and was outbid. This means that in actuality he had to pay more than the market value for his home because the US government was propping up the price due to the tax credit. So what will happen next year? The prices will probably come back down after the tax credit expires ultimately causing my son to lose $8000 or more in house equity.
Does this really help the housing market or just delay the inevitable?
Now Congress has passed a $6500 tax credit for people that have already owned a residence for 5 years (out of the last eight years). This gives homeowners an incentive to put their house up for sale and buy a new one. Does this help the housing market? No. Most will sell their existing home in order to buy a new one so the net effect on housing demand and therefore housing prices will be zero. It certainly will accelerate the number of homes sold helping realtors, title companies, new home builders, mortgage companies, banks, etc. Since it does not increase housing demand it will only serve to temporarily pump up real estate activity at the expense of deficit spending. In other words it will only churn dollars and temporarily enrich employees in the real estate acquisition businesses (haven’t we bailed out the banks enough?). Not a fair or wise move in my opinion.
What are we doing?
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- The home-buyer tax credit: Throwing good money after bad (washingtonpost.com)
