I've just spent several hours reading about the Economy and here's what I've come up with (Sorry it's so long):
The Fed Released the Beige Book, on October 21, 2009. It begins with this statement:
"Reports from the 12 Federal Reserve Districts indicated either stabilization or modest improvements in many sectors since the last report, albeit often from depressed levels. Leading the more positive sector reports among Districts were residential real estate and manufacturing, both of which continued a pattern of improvement that emerged over the summer. Reports on consumer spending and nonfinancial services were mixed."
Well, that's not too surprising - First Time Homebuyers are finally deciding to purchase with the end of the Tax Credit nearing. Further in the report it says:
"Most Districts reported that housing market conditions improved in recent weeks, primarily from a pickup in sales of low- to middle-priced houses. Contacts reported that sales were boosted by the government's tax credit for first-time homebuyers... Sales of higher-priced homes were very slow... Moreover, real estate agents in the Boston and Cleveland Districts were uncertain about the future of home sales once the tax credit expires. Availability of financing continued to be a concern for potential buyers..."
What is it that normally causes people to purchase homes? JOBS. When people feel secure about their JOB, they will then purchase homes! Dr. David Altig, Senior VP and Research Director at the Atlanta Fed, points out on October 21, 2009 that we have a PROBLEM with Jobs and Unemployment, on a scale that we've never seen before!
Underneath the usual total unemployment numbers are the reasons an individual is unemployed: You are on temporary layoff; you quit your job; you have reentered the labor market and have yet to find a job; or you are entering the job market for the first time and have yet to find a job. Or, finally, you have been permanently separated from your previous employer, who has no expectation of hiring you back.
The last category is the dominant reason for unemployment at this time. That might not seem surprising, but it actually is. Never, in the six recessions preceding the latest one, did permanent separations account for more than 45 percent of the unemployed. The current percentage stands at 56 percent as of September and appears to be still climbing
"The number of people receiving paychecks will drive the demand for houses and apartments, and the recovery will begin when unemployment stops rising." said, Jay Brinkmann, Chief Economist for the Mortgage Bankers Association,in Testimony on Tuesday.
The Obama Administration is (obviously) aware of all of this, and Congress is Holding Hearings to extend the Tax Credit... But the question remains, with a HUGE deficeit, do we NEED to extend the Tax Credit?
I thought a report by the Carnegie Endowment was interesting. It looked at Housing as a Percent of GDP, and weather a Gradual Rise in the Housing Market would impact GDP, Consumer Confidence (which most feel is tied to Consumer Spending and Job Growth). In otherwords, is the Housing Market a CRITICAL ingredient in creating a healthier Economy? YES!
"Looking forward, even moderate improvements in the housing market will provide a significant boost to the global economy."
Besides the Tax Credit, there are other factors effecting the small movements in the Housing Market. 
Obviously having historically low interest rates helps folks qualify. The Federal Government purchase of Mortgage Backed Securities is slated to END in March, 2010. When this happens:
"Analysts at Barclays Capital in New York forecast mortgage rates will be slightly over 6% by the end of March."
Coincidentially, Credit is becoming Tighter at the end of March, according to Fannie Mae Guidelines... and there are reports that the number of foreclosures entering the market will continue to rise. So again, IS THE TAX CREDIT EXTENSION NECESSARY??
"Senate Banking Committee Chairman Chris Dodd said, "We still need to use every tool at our disposal" to help the housing market. Dodd, D-Conn., has joined Sen. Johnny Isakson, R-Ga., in sponsoring a bill that would extend the credit until June 30 and expand it to people who already own homes."
It will conservatively cost 1 BILLION dollars a month to Extend the Credit.
The IRS says the level of FRAUD is "Disturbing." The IRS opened 107,000 civil cases related to the credit and identified 167 criminal schemes at an additional cost of over a HALF A BILLION $$!!
An interview of Tim Geithner by CNBC Anchor, Maria Bartiromo went like this:
BARTIROMO: You look at what happened with the cash for clunkers deal. We went from horrible to great to horrible again. The first-time homebuyer credit. So what happens when the stimulus is gone?
Sec. GEITHNER: ... We're not going to make the mistake many countries made in the past of putting the brakes on too early and creating risk that we have a, you know, weaker recovery with even higher levels of unemployment going forward.
I guess I weigh in like this. I study the Four Bad Bears. I think if the "Collective They" allow the Tax Credit to Expire, Raise rates (through a change in Policy) and make it even more difficult to purchase because of tightening Credit Score Guidelines - we're looking at a "W" in the recovery - and we'll be looking more like the 1929 - 1932 Era. Housing is an important part of the Recovery. If we had a great JOBs Picture - I'd feel differently.
There is no reason to saddle our children and grand children with additional debt that serves no purpose. Those that are only buying due to the taxpayer gift will suffer. They will end in foreclosure and have a bad credit rating. The majority simply came in earlier than they would have which did little. The entry level inventory has been reduced which is a good thing. A few Realtors may be able to hang on another year before finding their real career. NAR added fuel to the 'Realtors are greedy' fire. Mostly, obama was able to pander to his voter base which was probably the sole reason it was done as his numbers drop.
I too have been spending a lot of time researching this. I agree that the key is jobs. My quetion to you is, what sector of the economy creates more jobs than the housing market. Then look at the trickle down effect from there.
In other words, God help us!
I'm not for the extension of the tax credit. Unemployment is getting worse right now. It WILL improve but loaning more money right now for FTHB creates a false and temporary economy. IMHO! Great post.
Yeah - well I can see both sides. It's EXPENSIVE the way it's currently written... and it's FLAWED if that many people are ALREADY creating Fraud!
But - the Economy is currently in a really fragile place - and I hate to see it go down further. The Beige Book said, " Leading the more positive sector reports among Districts were residential real estate and manufacturing, both of which continued a pattern of improvement that emerged over the summer."
Eleanor - Personally, I would love to see them extend the Tax Credit with the provision of some type of repayment clause (low, no interest loan).
A great, comprehensive post....ADMIRE YOUR RESEARCH! kUDOS
Mark Twain once said there are three types of lies; lies, damnable lies and statistics. If your are either for or against extending the tax credit, you can find a statistic to support your position. For example, NAR just testified in front of Congress to support the extension. They cited two statistics. One was that since the tax credit was enacted, housing inventories nationwide went down from 9 months to 8 months. The second statistic was that every closing generates about $65,000 in economic activity, essentially one new job. Do not ask me where they got that number from. It kind of makes sense. Think about it, look at all the fees that are generated with home purchase. Realtor commissions, lender commissions, appraiser fees, attorney fees, etc. If that is true, I think it is a pretty good return on your investment, $8,000 creates $65,000. Oh well, another lie.
Hi Eleanor- I had just posted about this and then found your post. I hope that you don't mind that I have added a footnote and a link to come read your post. I think that it's excellent and appreciate that you put so much time into it! -- Sara
Eleanor - Personally, I'd like to see the first-time homebuyer tax credit program terminated. Everytime the government steps in to artificially inflate prices (which is what they're doing in this case), it sets it up for an even bigger price drop after the program ends. While we saw a modest increase in home prices as well as home sales recently, it was artificial. Once the program ends, I think we will see a resumption in the decline of home prices - primarily because people are losing thier jobs and are not able to find work. And, unless something is done to get people back to work, we could be headed for even more trouble down the road.
But, if the first-time homebuyer tax credit program must be extended, then let it be in the form of an "interest free loan" that must be paid back over time (as the program was in 2008). While it's peanuts in the grand scheme of things, this country has over extended itself and it's time to tighten the belt. The massive debt will cause even greater harm to our economy.
Hey Sara - No problem! Wow! I got a Star - Thanks AR Gods!
The reason this post is so long is because I'm like alot of you - I'm worried about the hole we're digging ourself into! I think Lewis and Jason are probably right. If they do some kind of extension, they should revisit the 2008 bill!
The most important thing is J-O-B-S! I did another post today asking if HUD could be headed towards REQUIRING Energy Efficient Standards in Homes? The White House is asking all departments for a report before the end of the year detailing ways to REDUCE GREENHOUSE GAS. Well, don't you think that could mean that leaky windows will HAVE to be replaced?
I'm not saying it's a bad idea - and it might create more jobs? But gosh, wouldn't that be expensive for folks who are already facing a loss of equity?
Eleanor,
Congrats on the feature. It seems to me that the tax credit is not the best direction. It does not give the best bang for the buck and probably only borrows from next quarters sales.
Thanks,
Richard
Don't forget that the tax credit infuses the economy with more when those buyers get their money back to them.
In Ron Phillips's (VP of the NAR) testimony to congress, he quoted Arun Raha, chief economist for the state of Washington, who was quoted in the Seattle Times saying: "every 1,000 home sales generate $112.4 million of economic activity with $71.9 million of it directly from home-sale preparation and the actual real-estate transaction. In addition, more than 700 new jobs are created. This is not a balance-sheet bailout, it's real help for our neighbors and communities."
Something to consider.
http://activerain.com/blogsview/1296035/nar-to-congress-continue-helping-housing-recovery-
I've also done extensive research on the tax credit since it was first initiated, and I think it's been a bad idea from the start. What it does is artificially stimulate the market, which is what was happening after the dot-com meltdown. Sure we all feel for those who don't have jobs, for those who are losing their homes to foreclosure, but the tax credit is just another form of bailout--a bandaid on a gaping wound. Until the government creates incentives to first stimulate jobs, little will improve.
And there is more potential for calamity than whether or not we extend the tax credit. Earlier today I did a post on that topic.
If fraud can be mitigated, the tax credit isn't a bad idea. However, I think having to repay it over a period of time wasn't a bad idea initially with the original $7500 credit. It was introduced so early in the downturn that not many people took advantage of it....now their upset they didn't wait for the free $8000. That said, criminals will find a loop hole in every government subsidy that ruins it for everyone else. My only real comment to our governement is.....before you give away the farm, research the logistics of being able to monitor it once it's in place. It's easy to have an idea and throw it to the wind without doing the leg work to determine the obvious pitfalls. Who didn't see this coming?
Hi Eleanor, eventually either now or soon the credit needs to expire to bring back a normal market. Just like ending cash for clunkers, the government can't forever stay the crutch.
I'd like to see the home buyer tax credit expire and be replaced with a new tax incentive effective in March of 2010, which may help offset increased interest rates. The spring market could most likely use a push more so than the winter market.
Eleanor,
Great look at the whole situation. Lots pros and cons for it. The economy needs a stronger housing market to get back on its feet, and extending the tax credit would help.
No, we do not.
Nicely done post, very deserving of a feature.
I feel very insettled about not only the real estate market, but our country in general. I've never been this scared.
Eleanor,
Read your article and still cannot decide if it is worth extending it......we have a lot at stake in real estate, and it is a big help, but we also have so many other areas that need desperate help.
Jobs are the #1 thing that we really need to get jumping and then I think the market may correct itself somewhat, if it does not, then maybe we can provide something for the first time homebuyer.....never did I think we would see so many ways that our real estate industry needed help, and of course the buyers and sellers. It is a double edged sword, and somehow I feel that we are dammed if we do, and dammed if we don't. We have so many homes on the market here in the St Pete, FL area, and so many still in foreclosure, and now so many that are not tended too as far as lawn and regular maintenance that it is a shame......
If someone out there comes up with any better ideas, let's share them and get them to our representatives! Maybe they will listen to us!
Debbie Flay
I agree jobs are key to our recovery. I would love to see the credit extended, but believe the real estate market will at some point need to stand on own two feet and eliminate the credit.
We have buyers that wanted to buy before the end of November to take advantage of the credit but are holding off because they are concerned about their own job security. In fact, another agent in my group was about to write an offer Monday night but the buyers canceled as one of them lost their job.
As important as it is to stimulate the market, it is equally important to create an environment that offers more job security.
Elizabeth's idea is a better alternative than extending it automatically now. The moment rates go up Buyers' fears will be intensified.
Eleanor,
You didn't look at the costs. The credit that is about to expire cost $43,000 in debt for each incremental home buyer. Using the NAR and NAHB numbers, the extension is projected to cost at least $259,000 for each incremental buyer.
It is not needed. It is criminal theft at the behest of the NAR.
Ms. El - you've outdone yourself!!! Fabulous rehash of a messy situation. I for one don't want this tax credit extended but agree with Elizabeth Weintraub - I'd like to see another one come out in the spring. I think we need to step back and evaluate how this one did work. Could it be improved? There's a lot of suggestions of extending to all home buyers - maybe that would be even better in jump starting the ripple effect on jobs. Well done and congrats on the well deserved shiny new
!
I'm still on the fence about this one. The level of fraud is concerning. Jobs are definitely a key factor in getting things going again. What I do know for sure is either way, I'll be on the ground, helping out homeowners who need solutions, and don't have time to wait for legislation.
Eleanor, Excellent post! I am so down with you on this.
I believe unless unemployment improves we are going to be in trouble and could have a double dip recession in this economy. The unemployment rate must improve in order for the housing market to improve substantially and this will be the key to the overall recovery of the economy. We need more J-O-B-S.
The tax credit has helped to some degree, but frankly, if the availability of homes at 50% of their previous selling prices wasn't enough to bring buyers back into the market, I am not sure that continuing it will bring about any significant impact. Even if it did work, it only brings forth the purchase (leaving a hole in the future economy where the purchase would otherwise be) while heaping on more govt. funding to an already staggering debt the country is amassing.
Thanks for the thorough research and good article. This is something we will have to watch very closely. I see your point but I am hoping they extend the credit.
Shari
Eleanor,
Some other considerations:
What happens to the value of the dollar from excess borrowing / printing to pay for all of these programs? (The Federal Deficit is already over $1.45 Trillion for the year...)
Who really benefits from propping up home prices with these subsidies? Owners doing a short sale? No... Banks? Yes... (Really now... think about the % of homes selling that are "distressed" sales and who is really taking the beating.)
Are we going to have the discussion of extending the tax credit every time it comes near the end? Really now... buyers have had over 6 months to take advantage of this...
Are High Home Values really good for the consumer and/or economy? All things the same... what's better for the economy -- A homeowner with a $1,200 mortgage or a $2,000 Mortgage?
Personally....I'd prefer to see people being able to take out cash advances on their credit cards to make a down payment so I'm not on the hook for it.
Because seriously... you are on the hook for it one way or another.... even if you can't take advantage of the money giveaway.
(By the way... High housing prices, cheap and easy credit created the economic crisis in the first place. Trying to repeat it through a different system is only going to delay the inevitable. Resources are currently being wasted. Instead of going to something that creates Real, Sustainable jobs for a True Recovery... we are throwing more money at the banks in a roundabout way.)
I was just listening to the news about the fraud cases and it is amazing when you listen to who claimed this credit. If they do extend, which personally I think would be the wrong thing to do, then they need to think of a better way to control who claims it. It will cost a lot of money to go after the abusers, what a waste--again.
Though it certainly can't hurt our business in the short-term to extend it, I think for the greater good of our country they should let it expire.
I'm in the expiration camp. Firmly. And I agree that jobs are at the center... and at the center of jobs are small businesses. And peeling the final layer of the onion, I think that we need to radically alter they way we tax small business... But that is a completely different subject.
Eleanor, what a well presented article, congrats on the feature, well deserved. I feel that while the credit has urged some folks to move, I have not seen the effect we were hoping for, I have a couple of buyers that were interested but they are not being pressured by it. There is another side to this and that cannot be measured and that is perception, the more we talk about credits, tax relief, extending, making the credit available to everyone...what are we doing, but having people second guess, wait, and delay a purchase just because. I say we end it and let the cards fall where they lay. The sooner we get back to normal conditions the better.
See you soon.
I agree with those that think the credit needs to be extended at least until the unemployment numbers start moving in the right direction.
I agree with the need to extend the credit, yes we are "bailing" out the first homeowner,the builders,the realtors,the plumbers,the electricians,the real estate lawyers,home depot and dozens of others who are helped by the sale of homes. To me it is a no brainer compared to bailing out the CEO's of the banks... or should I say the crooks that have raped the american people to get thier million dollar bonus... and I don't see these people as the ones being foreclosed, those individuals were people who over extended themselves into mega colonials promised low interest loans by crooked bankers only to see the adjustable rate explode thier payment after the initial 1-3 year honeymoon.
First - There is no "$8.000 Tax Credit." The credit is 10% of the homes cost up to $8.000. Many folk that qualify are buying homes that cost much less. This terminology misleads a group of home buyers that typically do not hire tax preparers in the first place, many of whom will be disappointed to find out how little of $8,000 they are actually entitled to as a refund. Second you cannot tell if a person qualifies without knowing if they are (legally) married. In the light of fair housing law, lets have a show of hands on who is going to navigate that swamp. Because of these areas of exposure we should not be discussing the credit with customers at all.
Im not going to argue that this program should be terminalted....thats my personal view...
But, what I am going to do is congratulate you on a wonderfully well thought-out presentation and analysis!! My economics professor would applaude you!
Nice work!
are we just robbing future purchase with the 8K? at what cost?
I do want to chime on on a very good post though!
Hey! Thanks everybody for commenting! My husband thinks I need to join "Link A Holics Annonymous!"
Dan Homan is absolutely correct - there's no guarantee of a $8000 check, and it can be misleading.
To France and Mark Clausen; small business is the main generator of jobs in America. As long as the government keeps distorting the market with our tax dollars, small business will remain stagnant; as will job creation. The tax credit needs to expire. Government intrusion into the market can only prolong the pain.
Eleanor - Great post...obviously a great deal of effort and analysis went into this. Everyone has an opinion on this of course, but the bottom line is, at this point, all we have to do is wait and see. In my market we're already seeing a shift from buyers to shoppers. In a week or two, we should know for certain whether the buying has ended and the market becomes stagnant again. My feeling is that if the market slows considerably and nothing is done to get it moving again, the next wave of foreclosures will happen and we will see a major drop in prices again. It's a perfect example of "somebody has to do something". Failure (and inaction) are not options here.
Hi Eleanor! Excellent information and I have to say that I agree with Susie--although ambivalent about this, my mind tells me that this is not good for our economy--it's just a band-aid; and my heart says, YES! Let's get some homes moving! I struggle with this but, just don't want to see this end and then find that we're right back where we came from all over again!
Congrats on the FEATURE! You ROCK girl!