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Our Opinion: No New Tax Credit Coming

Reuters report 9/1: “It is not high on anyone’s list that we have heard. We have not heard Congress talking about renewing it.”  – HUD Secretary Shaun Donovan regarding a possible renewal of the homebuyer tax credit.

 

ORIGINAL POST

Rumors are running wild that the administration is considering a new tax credit for homebuyers. We don’t want to comment on whether or not a new tax credit would be a good or bad thing for real estate right now. We’ll let others handle that hot potato. Our goal is to give you the best, up-to-date information on the chances it will happen.

Our strong belief is that it will NOT happen.

The rumor started when Housing and Urban Development Secretary Shaun Donovan appeared on CNN‘s “State of the Union with Candy Crowley” on Sunday. CNN reported:

When pressed on whether the White House will now push for an extension of the tax credit, Donovan suggested the credit will not come back in the short-term but he left the door open to bringing it back down the road if the industry does not improve.

“I think it’s too early to say, after one month of numbers, whether the tax credit will be revived or not,” Donovan told CNN. “All I can tell you is that we are watching very carefully. I talked earlier about new tools that we will launch in the coming week, and we are going to be focused on where the housing market is moving going forward. And we’re going to do everything we can to make sure that this market stabilizes and recovers.”

This started a firestorm of conversation as to whether the administration was going to announce a new tax credit anytime soon.

What has happened since?

Economist Tom Lawler came out saying he believes that Donovan was caught off guard and started to adlib a response:

As best as I can tell Secretary Donovan was in New Orleans giving interviews on the “Katrina” anniversary, but CNN’s reporter focused first on housing and the possibility of a “double dip.” and Donovan appeared to be “winging it.”

The Wall Street Journal reported:

On Monday, there was this reply from Robert Gibbs, the White House press secretary: “I think bringing that [tax credit] back is not on — is not as high on the list as many other things are.”

Diana Olick from CNBC stated:

I went the official route and followed up with a HUD spokesperson who responded:  “No news here…there are no discussions underway to revive the credit.”

Why do we think it won’t happen?

The purpose of the original tax credit was to lower the supply of homes on the market by increasing demand. The administration felt that was necessary to stabilize prices. It worked in November. Inventory did decrease and prices stabilized.

However, as we can see by the graph below, the extension of the tax credit actually did the exact opposite in April. Instead of lowering supply, it prompted sellers (both homeowners and banks with a pent-up supply of distressed properties) to put their houses on the market as they saw an opportunity to sell.

We do not believe that the administration or Congress will try to lower supply that way again. They are trying to limit supply by preventing foreclosures using an assortment of refinancing and modification programs instead.

Bottom Line

There is no way for anyone to be 100% sure of anything pertainig to the housing market right now. However, we strongly believe that buyers should not put off a decision to purchase in anticipation of a tax credit that probably will never come to fruition. Find the home of your dreams, move in and make sure that you and your family begin enjoying the lifestyle you always dreamt about and deserve. That is so much more important than a couple of dollars you may never see anyway.


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3 replies
  1. Todd Waller
    Todd Waller says:

    The KCM Crew,

    While I concur with your analysis of why the tax credit extension likely won’t happen, the fly in the ointment could be the fact that this is an election year. It seems that politicians *might* do nearly anything to ensure reelection…

    Reply
  2. Bob Portale
    Bob Portale says:

    With the auto industry today reporting equally distressing news that it experienced its worst sales month in 27 years (coming off the heels of its own government incentives in 2009), it is hard to imagine a great deal of improvement in either sector until employment and consumer confidence improves. Add to this the cyclical nature of real estate and it may get worse before it gets better. Yet, corporate relocation volume seems to be maintaining improved levels over 2009. Cautious optimism is still the overriding theme in these circles.

    Reply

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