Proposed $15,000 Home Buyer Tax Credit Misses the Point

The Republican Party in America is adamant that only people who are currently making money will actually get money from the “the stimulus bill” currently being debated in Congress. Toward that end the party has proposed a $15,000 tax credit for new home buyers as part of their plan to stimulate recovery in the housing sector.

In order to take advantage of the credit, a home buyer will have to spend at least $150,000 on the home purchased, and will have to be able to qualify for a mortgage and earn at least $81,900 per year. Anyone making less than that will not be able to use the credit, because anyone making less than that does not pay $15,000 in taxes each year.

Realtors estimate the tax credit will help to sell up to 1 million homes.

Anyway, they hope it will.

That’s great for the one million households out there making over $81,900 per year. Sort of. It’s great, and it isn’t.

First of all, those people aren’t really having a lot of trouble right now, so they aren’t really in dire need of help from the federal government. Why not? Because they are making $81,900 a year! Those people likely already live indoors and are able to pay their bills. The reason they  aren’t buying houses has nothing to do with not being able to afford to buy houses. They can afford it, they just aren’t doing it.

If they don’t own a home yet, the tax credit will be a great deal for some of them. If they do own a home and want to move up to a bigger one, it will be less of a great deal, since they will then have to unload their old homes in order to buy–no small task in this market.

The problem the United States is having right has nothing to do with middle class people with good jobs not being able to afford homes. Those people were already perfectly able to afford homes before the stimulus bill, and those people will still be able to afford homes (on even better terms) after the stimulus bill ushers in the new $15,000 tax credits.

No, the problem is that many, many homes have depreciated in value so rapidly that people are afraid to buy.

Some homes have plunged so far so fast that they cannot be sold for enough money for the sellers to get out from under the mortgages. In many cases, homes are being lost to foreclosure because the mortgage loans made on them are so severely ‘upside down’ that they cannot be refinanced. The glut of foreclosures was critical last year and promises to worsen in 2009 as yet another wave of Alt-A and creative financing mortgages reset to a higher interest rate, or in many cases reset to include principal payments for the first time.

In many parts of the country, sheriff’s departments are suspending foreclosure evictions because 1) they do not have the staff to execute all the evictions on file, 2) the communities are already so severely stressed that there are no resources for housing the evicted families, many of whom are unemployed, and 3) the states and cities where the homes are located are buying time, hoping the federal government will come up with a fix to the problem of rampant foreclosure and housing deflation.

The $15,000 tax credit does not address any of the fundamental problems in the United States housing market, it just makes the Republican party members who sponsored it feel good about themselves and gives them Ronald Reagan bragging rights for the next cable television show appearance.

The proposed tax credit does nothing to quell the fears of qualified buyers that the great deal they get on a home today will turn into a loss over the coming two to four years as the value of the home depreciates steadily in spite of their tax perk. If you get a$225,000 home for $150,000, that feels like a great deal until the home depreciates to $130,000 the following year and $100,000 after four years. Everybody has to live somewhere, so the tax break may well be the critical push needed for some first-time buyers.

Others will continue to sit on their hands until the can see the bottom.

Even if the tax credit moves all one million homes, it does nothing to address the core issue. For all the money the United States has thrown at the current economic crisis, the core problem of housing deflation is still being pretty much entirely ignored–which, if you think about it, is really quite insane.

For more on how to invest in American real estate, read our article on United States Real Estate Prospects for 2009.