The Home-Buyer’s “Tax Credit”

The other night, I had a dream. In this dream, I was watching a TV show with a line of enormous dominoes made of dense foam, like the type you see in action game-shows where the contestant has to run across the top or else fall into some kind of disturbing substance that has the effect of breaking the fall of the contestant while simultaneously humiliating them.

These dominoes, though, were titanic. Hundreds of people perched on top of them, jumping from one to the next. Some few were several dominoes ahead of the pack, leaping and leaving an unstable but still standing domino behind them. The bulk of people hopped just one step ahead of the toppling dominoes, unstably wobbling atop their current perch, and many fell into the slime with each falling obelisk.

The dominoes each had labels. The fallen included “Deficit Spending”, “Investment Banking”, “Savings & Loans”, “Dot-Com stocks”, “Real-Estate investment”, and “Energy futures”. Yet to fall were many more, but I couldn’t distinguish the label of any given domino until it began to lean under the crushing weight of all the people piling onto it.

In that vein, I just found out some disturbing news regarding the so-called $7500 new-home-buyer “tax credit” as part of the recently-passed Housing Rescue Bill.

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

In addition to the well-known qualifications, such as not having owned a home in the past three years, here are some sobering details regarding this so-called “tax credit”:

• The tax credit is 10% of the home’s sale price with a maximum of $7500.
• You can claim the credit on taxes filed in 2008 or 2009.
• It’s a credit and not a deduction (difference between tax credit and tax deduction).
• “Tax credit” is a misnomer because it’s really a zero percent loan with some qualifications.

I have heard the following pitch on the radio several times: “So now is a great time to go buy a home, because with your $7500 tax credit, you can go get a loan for the $7500, buy the house, and pay off the loan once you get your credit in April.”

On the one hand, I say “great incentive!” because, really, who wouldn’t jump at an interest-free, tax-free, 15-year-term $7500 loan that you can defer for two years? On the other hand, I can’t help but think this is a really bad idea. Ultimately, we taxpayers are footing the bill for these interest-free loans to new home buyers. As a homeowner for the past ten years, that means that I am effectively subsidizing purchases for the first-timers right now.

So now I’m paying Social Security and medical insurance for all the octogenarian baby-boomers as well as subsidizing purchases of new homes by twenty-five-year-old newlyweds when I did it the hard way?

The other day, I decided to hop on my motorcycle and just drive around my new neighborhood to see what was there. I live on the border of two towns: Riverton and Herriman. Riverton is a fairly well-established city, while Herriman was an out-of-the-way town that was considered a small town until the housing boom.

I toured the south side of the city, following signs promoting a contest to win a free house in a new development. There the development stood, home after home, and row-house after row-house, on a beautiful weekday evening. The landscaping was finished throughout, but only one home in five showed signs of being lived in. The empty eyes of upstairs windows with no furnishings and no blinds peered out over the desolation of a housing development mostly finished yet unoccupied. The enormous streets ended in Jersey barriers, the lights unlit, with no traffic.

This is the future of the American housing market for some years to come. Empty bedrooms facing empty streets because of the development frenzy new-home-fever that gripped our nation. I steadfastly believed as early as 2003 that too-easy home ownership — principally zero-down and sub-prime lending, though I called it “loaning money to people who can’t pay it back” — was killing the U.S. real-estate market.

I was told that I was needlessly concerned, because real-estate is such a safe investment. I was told I was too negative, and that the real-estate boom was just a long correction to pent-up housing demand.

The reality is that the housing boom was driven by the domino labeled “low-interest home loans” placed by Alan Greenspan in response to the falling dominoes entitled “dot-com stocks” and “looming recession”. It’s easy to forget because 9-11 happened in the interim, with all of its accompanying dominoes, and took most of our attention for a while.

Some days, I hate being right when everybody thinks I’m wrong.

I have blogged before about the uselessness of Band-Aid solutions for gushing-artery problems. This new-home-buyer loan — fraudulently marketed as a “tax credit” — strikes me as yet another such “solution”. Taxpayer-subsidized bailouts of financial institutions, and now the real-estate industry, do little but forestall the inevitable as the industry topples behind the herd of game-show players who think it’s the next big thing.

Our representatives have elected to shove the bodies of over-burdened taxpayers underneath these falling dominoes to keep them from bottoming out. I do not believe this is a recipe for long-term financial health in our country.

I do believe, however, there are real solutions for some of the problems facing us today, but they may involve allowing the current domino-jumpers to fall with their precarious investments before the economy can recover.

I believe the energy crises can be permanently solved by developing renewable energy solutions — preferably cheap ones — and implementing strong conservation efforts.

I believe the financial-market crises can be permanently solved by implementing stricter oversight that isn’t self-managed (today’s NYSE is run by the same companies it is expected to police, leading to obvious and flagrant corruption with regular abuse of shareholders), and allowing companies with questionable portfolios to fail.

I believe our country’s enormous budget deficits can be overcome through prudent reductions of expenditures, mainly in the areas of overseas policing and entitlement programs.

That said, I do not believe the current real-estate crisis can be solved quickly. Developers over-built and speculators with deep pockets drove up prices by a phenomenal margin. This boom-bust cycle often happens even within a single city, driven by just a few industries, and I do not know an accurate way to gauge future housing demand on such a micro-economic scale. These things correct themselves in time, but that time — as evidenced by some city’s boom-bust cycles that have been in the “bust” phase for decades — may be much longer than a typical person is willing to wait.

Today we see the fruits of herd mentality in action, and barring a baby boom or opening US borders to wider-scale immigration, we’re stuck with a housing surplus for a number of years to come. Of course, loosening immigration restrictions or encouraging more childbirth among the upper-middle-class would bring with it its own set of problems.

The dominoes just keep falling. I wonder what’s next?

(My bet is on “wartime spending”, toppling the twin dominoes of “defense contracts” and “energy stocks”.)