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The reporters covering the stimulus have been so busy editorializing against it that they haven’t had time to pay attention to what Congress is doing. Last night Congress approved the Isakson amendment which gives $15,000 (or 10 percent of the purchase price, whichever is lower) to every person who buys a home in 2009.
Somehow, Isakson puts the cost of his tax break at just $19 billion. Let’s break the Washington rules and try a little arithmetic. Even with weakness in the housing market, it is still virtually certain that we will sell close to 5 million homes in 2009. The overwhelming majority would qualify for the full credit. So, we get 5 million times $15,000. That sounds a lot like $75 billion.
And this is before we get to any gaming. It’s hard to see why tens of millions of people wouldn’t figure out a way to buy a house from a friend or relative and get their $15k. If we can get one-third of the country’s homes to change hands (lots of jobs for realtors) that would be good for $375 billion.
It also is worth raising a question or two about the wisdom of having Fannie and Freddie buying up mortgages at 4.0 -4.25 percent, as required by Isakson’s amendment. Suppose that the economy recovers in a few years (not likely if this crew is controlling economic policy) and mortgage interest rates rise back to more normal levels.
The 30-year mortgages that Fannie and Freddie issue today at 4.0 percent interest will be worth about 20 percent less in 3 years if the interest rate has risen to 7.0 percent. If we get $2 trillion in mortgages at the 4.0 percent rate, then this gives Fannie and Freddie losses of $400 billion. This may be a cost worth enduring to boost the economy, but it would be worth at least noting in assessing the proposal. After all, a few hundred billion here and a few hundred billion there can add up to real money.
It would have been helpful if the reporters covering the debate could take a little time explaining these issues to readers.
6 Comments
thanks for the explanation dean. so stupid and infuriating.
also…. went looking for the roll call vote, so i would know which senators to be pissed off at, but couldn’t find it. turns out it was a voice vote. from the nyt blog: Tax Credit for Homebuyers Passes
cowards.
All this does as far as I’m concerned is subsidize sharks who will take advantage of Bush’s plan to use our homes as collateral for the banks lending schemes over the last 4+ years.
but, I guess that having SOMEONE in these houses is better than letting them sit empty for vandals of squatters.
Love your work Dean. I do have to disagree you on one point, however.
There is actually a provision in there attempting to prevent the “buying a house from a friend or a relative” gaming which you mention. Of note is the following:
In other words, in order to get the credit the owner actually has to occupy the residence at the same time that they qualify for the credit. There might be some actual fraud in regard to this, but I would say that it’s pretty difficult to do so. It comes close to the Bush administration’s “all rich people game the system, so why tax them.” argument.
Furthermore, in order to receive a loan, a lender makes you get homeowners’ insurance or they won’t approve the loan. You must actually occupy the residence in order to get homeowners’ insurance. In other words, from a real world perspective that is another disincentive for gaming of the system to occur.
Even with inflated prices, $150,000 is not going to buy you much of a house, so this credit does help from the bottom up. As the price of the purchased house goes up, the less credit you get as their is a fixed floor. That said, I really don’t know if in a bad economy where people are losing their jobs, people are going to make a long term investment in a new house in the first place. A 30-year mortgage is pretty daunting investment after all.
I personally think that taxpayer dollars could be put to better use than re-inflating the real estate bubble, but we need to get the facts completely straight here. Ian Welsh has suggested on this very site that we do need to do something about guaranteeing a lot of the toxic mortgages, such as Alt-A’s and interest only resets which are on the books of a lot of financial institutions. A 4 to 4.5 percent rate, where people are actually repaying those bad loans are of more value than just having them reset to 7 or 8 percent. I think if we limit the low interest rate mortgages bought up by Fannie Mae and Freddie Mac to the same principal residence limitation, that is a good idea.
Here’s the link to the Isakson-Bachus amendment
Masaccio does a nice job explaining the Alexander 4-4.5 percent amendment and what policies it should be combined with, here.
Thanks for the links to the legislation and article. So compared to the $7500 credit for new home buyers that the previous provision had, there is no recapture of the credit max $15000 credit for anyone who takes it, if the new residence is held long enough? Cleaning up the previous provision would make sense to me rather than adding another provision. I have to wonder what happened to all those folks who argued for a simpler tax code a few years back. Also I have to wonder how long the additional property tax deduction to the standard deduction will last? I think it was allowed as a way to keep track of people who might already has a residence and deducting property tax expense and therefore not eligible for the $7500 max credit. But if $15000 max credit is the main credit then probably would not need the property tax deduction as an addition to standard deduction.