Will the housing credit expire as planned on November 30th?

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As the home buyer credit moves toward expiration, it is getting mixed reviews.  Realtors and some economists are saying it did exactly what it was meant to do... stimulate recovery. The credit, they say is directly responsible for several hundred thousand home sales.

Others point out that while that does appear to be true, the aura of success pales when you look at it in light of the total credits granted and the cost to the nation. Ted Gayer, co-director of economic studies at Brookings Institute says this tax provision is costing the government far more than the value of the credit, in fact, about $43,000 per home sale. That's because, by Gayer's estimate, by the credit's expiration date of November 30, two million taxpayers would've taken advantage of the credit, but of those, only 350,000 are sales that were "created" by the credit. The other 1.65 million credits were used by people who already planned to buy, says Gayer. The National Association of Realtors agrees with Gayer; Moody's Economy maintains that the number of created home sales is closer to 400,000.

The proposed changes and the cost estimates

Forty percent of today's homebuyers will qualify for the credit as it is, but they have to be in a position to use it and be able to close by this November 30th.  In its current form, the credit phases out for individuals earning more than $75,000 per year, or married couples earning more than $150,000.  Some who want to see the credit extended would also like to see the income limits rise to $150,000 and $300,000 respectively.  If an extension occurs with the new income limits, it could add $16.7 billion to the cost of the credit.   

Because of the short time frame and the rush to take advantage of this bonus, the credit itself has made it more difficult for would-be buyers in some parts of the country to close a deal at all. That's why some argue the credit should be extended. In the first week of September alone, the number of mortgage applications jumped 10 percent, as many rush to get in under the deadline.

Meanwhile, the original projected cost of the program has already more than doubled - to $15 billion - since it was included in February's stimulus bill. Unless it expires, some critics predict the housing credit will never die, and eventually it will be regarded as an entitlement.

Those in the real estate industry, including the National Association of Realtors, are pushing to see the credit extended through next summer if not longer. They, along with some legislators, are also hoping to get the credit expanded to $15,000 and allow all buyers to use it. Currently, to qualify, home buyers have to have not been homeowners for the last three years.   If the credit were expanded as the NAR suggests, the estimated cost of the credit could rise to as much as $100 billion.

You may remember... this credit is not brand new. It was originally passed under the Bush administration. According to the original credit terms, home buyers could qualify for a $7,500 credit, though they were expected to pay it back -- a provision which many thought promoted personal responsibility. Later, as the economy continued its downward spiral, Congress pushed for a $15,000 credit, which eventually got scaled back to $8,000. Republican Senator from Georgia, Johnny Isakson, is now requesting a $15,000 credit if homeowners remain in the home for at least two years. 

"The problem now is not first-time buyers, it's the move-up market - the guy transferred from Chicago to Atlanta who can't sell his house", said Isakson, a former real estate agent. That's why he and others want the credit extended and expanded to include more potential buyers. Extending the credit will, he says, get us through the winter, when home sales are the most dismal, and the spring, when home sales are generally the most robust.

The Congressional Budget Office estimates the cost of Isakson's plan to be an additional $16.7 billion. Isakson and some fellow lawmakers suggest that the way to offset the additional cost of the credit is to shuffle the unspent funds from the $787 stimulus bill.  Critics of that plan say that before that will happen, supporters will have to show that home sales have created more jobs than the stimulus bill.

Also pushing to extend the credit -- possibly up to one year from the original expiration date -- is David Crowe, Chief Economist for the National Association of Home Builders.  Crowe testified on October 20th before the Senate Banking Committee that letting the credit expire is like taking away one of the "most effective selling tools" realtors have, and extending the credit has the power to bring real recovery to the economy.

"We estimate this would increase home purchases by 383,000 and create nearly
350,000 jobs in the coming year", said Crowe.

Crowe added that a credit extension would also generate $16.1 billion in wages and salaries; $12.1 billion in business income, and tax income of $11.6 billion for federal, state and local governments. He'd also like to see Congress spur the housing market by taking steps to help avoid foreclosures with loan modifications and workouts, and by encouraging the banking industry to restore lending for viable home projects.

"This would provide relief for a major sector of the economy that has suffered because of regulatory excess and the inability of banks to provide the necessary funding and flexibility that would otherwise keep loans performing as scheduled", Crowe said.

Who opposes the extension and/or expansion of the credit?

In spite of arguments that sound compelling, many members of Congress are taking a slow and cautious approach to change. Some support a partial revision of the credit, but are not willing to give everything that is being sought.

House Majority Leader Steny Hoyer (D-MD) supports an extension of just one month, which would finish out the calendar year. But, he would also like to see Congress offset the additional cost of the extra month.

Charles Rangel (D-NY), the current Chairman of the House Ways and Means Committee, wants to extend the credit but continue to limit it to first time home buyers.

Another House Democrat, Earl Pomeroy of North Dakota (and a member of the Ways and Means Committee) takes a dimmer view of keeping the credit alive. "I don't think there's a majority in Congress ready to sign onto a very large unpaid-for extension or expansion",

As for the suggestion that the credit be paid for by shifting some of the stimulus bill funds, Pomeroy said supporters would have to show that changes to the credit would create more jobs than will the stimulus bill.

As the expiration date of the housing credit draws closer, the Obama Administration is taking a look at the option. HUD Secretary Shaun Donovan told reporters he needs to see more details outlining the potential costs of Isakson's plan.

"We understand the urgency, and in the next few weeks, we'll have data that will allow us to sit down with you and talk of an extension", Donovan said.

Donovan and his staff admit that, at this point, they are not convinced that Isakson's predictions of a catastrophic decline will follow if the credit expires as planned. Still, they are willing to listen to arguments for and against changes to the program.


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