In an effort to revive the stalled housing sales industry due to the dried up mortgage credit markets, President Obama and Congress signed into effect a $8,000 one time TEMPORARY housing tax credit for first-time homebuyers. It is effective through November 30, 2009. It was supposed to be CPR administered to faltering real estate markets, especially in those areas hardest hit by the fraudulent mortgage crisis. The projected cost of this program when the stimulus bill was passed by Congress in February 2009 was $7.5 billion. The credit did its job initially, encouraging housing sales in otherwise stalled markets, but has already gone on too long, costing well over $12 billion and we still have seven weeks to go. Approximately forty percent of all homebuyers during the effective time period have qualified for the program. The program is credited with spurring 400,000 existing home sales. Now, let's analyze further just in what way exactly it stimulated housing sales. In Nevada, Florida, and Arizona, some of the hardest hit markets, it forced stalled foreclosure litigation forward by the attorneys driving the banks who were doubly motivated by their own balance sheet bailouts to finally let get these overvalued assets off their books and take the losses, which prior to year-end 2008, they weren't willing to acknowledge. This is because without going forward on foreclosure actions on houses where homeowners were months, and even years behind in payments, they didn't have to take the hit to their books when the Federal government was assessing the health of banks for doling out TARP money.
The effect of all this has been to spill a couple of years worth of inventory into the Nevada, Arizona, and Florida markets all at once, or as fast as bank attorneys, judges, court clerks, process servers, and homeowners' associations can keep up with the court paperwork for the foreclosures. To be fair, the tax credit pushed some deserving, qualified homeowners into the market at that tipping point. Homeowners such as those who were sitting on the fence and were marginally not qualified for mortgages who crossed the line into approval when the tax credit was applied to the HUD sheet. Also qualifying were those who were renting and comparing the price of their rental to the effect the $8,000 one-time credit would have on reducing their prospective monthly mortgage payment suddenly making it affordable. Those were the qualified homebuyers who really effectively helped to buy up backed up inventory and reduce housing prices to where they would have been in late 2008 if the banks holding the mortgage backed securities had not been sitting on their failed assets without declaring them so as to qualify for more TARP money. This also stimulated the economy because everyone who has a new home heads to Home Depot or Lowes for supplies to customize it, and to furnitures store for new diggs to match the walls and carpet. I have no doubt that it has been effective in that way. However, at what cost?
What those of us who are not in Washington see happening now is that the same bargain hunting investors who fueled the artificial housing price run-up from 2004 through mid-2007, are buying properties at one half the price, after having defaulted on their FHA loans on the bets that they made in the faux-boom real estate years. These are the same "investors" that we see served with foreclosure papers often in the very same markets where they are buying alternative properties at half the price. And, they are once again renting them out. Many renters who had their underlying landlords default on mortgages fled these two sunbelt areas, sometimes for the shelter of parents' homes out of state, other relatives homes, or large rental buildings with more secure underlying mortgages where they couldn't be thrown out so easily. This has left an abundance of rental properties, effectively lowering the cost of monthly rent due to reduced demand and oversupply. For the first time in decades, Florida had a negative population growth in 2008 and I expect an even greater one with the higher number of foreclosures in 2009. That's great, except for the guy who owned a property at the real pricing prior to the fake boom, who was paying his taxes, mowing his lawn, and renting out his property at a fair rate to happy tenants. This landlord is now forced to lower the rental amount to respond to the increased supply of similar properties on the market to accommodate this new wave of "investing" (gambling) or watch his tenants move out. Then, with lowered rental receipts, the landlord is no longer able to cover his underlying mortgage. So, the ongoing presence of this $8,000 tax credit is lighting a fuse of dynamite that continues to run through perfectly good sectors of the American economy and ruin them.
Another negative impact of the $8,000 tax credit has been to put severe deflationary pressure on the housing market which the banks have this year flooded with two plus years of inventory. Prices in Florida and Arizona in many areas are less than half of what they were in the height of the fake real estate boom fueled by unqualified buyers, phony mortgages, and criminals throughout the food chain of the real estate industry who got fat off it. Prices have overcorrected and gone back to levels of the early 1990's in many cases. If price deflation continues in these real estate markets we will see more decent homeowners and rental owners who currently pay their mortgages unable (because of lowered rental receipts) or unwilling to pay their mortgages as the value of their underlying assets sinks further below the value of their outstanding mortgage obligations. Fuel this fire further with the greater than 10% unemployment in many Florida and Arizona counties and you have a recipe for spiralling economic disaster and completely unnecessary foreclosures. This great swirl down the toilet is quite a foreseeable result of this irresponsible fiscal policy.
When the Cash for Clunkers program ran out of money within days of its inauguration, it was funded a second time and then ended well before its predicted November 2009 end date. Why? Because that was a semblance of fiscal responsibility, or at least bringing the drunk home in a cab the second time around. The biggest problem with the $8,000 tax credit is that the program has been too expensive and way too far over budget such that it has caused further unnecessary housing price deflation in economies already hurting so that it is causing further defaulting on mortgages and deflationary pressure in the rental market resembling a sailor on an extended binge. And, increasingly, taxpayers are disgusted with funding other peoples' dreams when they have had to scrimp and save and fight to actualize their own. Homeowners who pay their monthly mortgage are asking, "where is my bailout?" I can get a loan modification if I don't pay my mortgage, I can get $8,000 towards a new first time home, and my bank got bailed out, but where is the reward for doing the right thing and working hard to pay my bills?
Congress and President Obama should not yield to the Real Estate and Banking lobbies who are of the top 10 contributors to campaigns by extending this housing tax credit. There are 1.1 million members of the National Association of Realtors who are counting on coercing the president to push not only for an extension of this credit, but they want a $15,000 credit for all homebuyers including investors and those with higher incomes so that their commissions can continue rolling in. But the price will be taken from the hides of the current homeowners who are simply paying their bills on time and never got a credit, and furthermore, due to price deflation of too much inventory clearing in too short a period of time, make it impossible for a normal homeowner who bought in the last 10-15 years to even get the principal amount out of his home in a sale. It will fuel irresponsible gambling in the real estate market which is what got us into this mess in the first place. The middle American will be paying the price, not the upper 5% of income and asset owners. It's just not right. This Cash for Homeowner Virigns has been an overly expensive program that has bilked the tax paying, American "good guy" homeowner who pays his monthly mortgage. In fact, we shouldn't wait until the end of November to end it. It should be retired early on November 1st, just like the ghosts and goblins of Halloween.
Kimberly Wilcox is currenty freelance writing about financial politics, as well as Healthcare policy, specifically, Chemical Injury and its medical & lifestyle consequences. She is a lifestyle coach to others with chemical injury, chronic fatigue, autism, Gulf War Syndrome & Fibromyalgia, as well as to professional athletes desiring peak performance without use of illegal PED's. She is an expert on Green Living and her new book will soon be published about the Green Life that she has been forced to live for the last decade.
