Did home buyers get screwed with the Federal Home Buyer Tax Credit? You make the call.

During the time the period of time the tax credits were in place interest rates nationally hovered around 5.0-5.25%. Immediately and precipitously after the expiration of the home buyer tax credit in April 2010, mortgage interest rates began falling steadily.  As of November 1st, rates now sit at around 3.75% and are down overall 1.25-1.5% since the program expired April 30th. Based on a 1.25% interest rate spread on a mortgage amount of $200,000 the Federal Home Buyer Tax Credit is wiped out by additional interest payments in just 32 months and at a 1.5% interest rate spread the tax credit is wiped out in just 27 months.

Also, during the time period when the home buyer tax credits were available, the median sales price increased dramatically. For example, in the Twin Cities market the median sales price in April 2010 was 11 % higher than it was in April 2009 translating to over $16,000. The median sales price continued rising through June (another $10,000) until all the related pending sales were cleared through the system. Since then, the median sales price has fallen off the cliff by $14,250 (so far).  This means many of these home buyers may already be underwater on their new home purchase.

By contrast, if you were to purchase a home today with a $200,00 mortgage at todays’s current interest rates a home buyer would save $12,380 in interest in just five years based on a 1.25% better rate and $14,835 based on 1.50%.  Add these interest savings to a lower purchase price of say $14,250 and the $6,500/$8,000 credits are not looking so good. The tax credits also have strings attached requiring home owners to stay in the home a minimum of three years.

Did the Federal Tax Credit prop up residential real estate prices and interest rate artificially? The answer seems fairly obvious. Had congress not gotten involved with the home buyer tax credits residential home prices and interest rates would have most certainly been lower, which would have benefited home buyers instead of BIG banks. BIG banks were the main recipients of both the higher resale prices and the higher interest rates. Washington figured out yet another way to give billions more to BIG banks at the expense of consumers (e.g. tax payers).

So there you have it…BIG banks were the BIG winners while home buyers (and tax payers) got screwed again. What do you think?

At the end of the day there is no crystal ball, but I think EXTENDING the home buyer tax credit for another 4-6 months might not be a bad idea for us every day average Americans.

My reasoning is that since the government has already intervened, they should see it through. The cost to extend four to six more months versus the cost to the economy if the real estate market reverses itself at this point in time makes extension a logical choice for me.

At the beginning of all this, I shared my opinion that the home buyer tax credit was not about “main street” but was about “Wall Street”. If this is true, the extension of the home buyer tax credit is contingent on the condition of the “too big to fail” group. Since the “too big to fail” group is stabilized, my belief is that the home buyer tax credit WILL NOT be extended even though it would help “main street”. I hope I’m wrong.

What do you think?

Of course, no one can be sure of exactly what will happen if the Home Buyer Tax credit is not extended.

Let’s think about the factors affecting a decision by Washington:
a – Spring IS the best time of year NOT to extend the home buyer tax credit because the market naturally gets busy this time of year. If the spring/summer demand can replace the home buyer tax credit demand, then NOT extending may be the logical choice.

b – The economy is still very fragile with unemployment hovering around ten percent. The uptick we are seeing in real estate may just be a bear market bump in an overall downward trend. Traditionally, bear market waives is the place when most of the wealth gets wiped out. Everyone thinks “it’s over” and it’s like getting run over by a Mac truck you never saw coming. There is not enough data yet to determine which way this is going mid-term and the fragile economy might point to extending.

c – The news is reporting that there will be another wave of home foreclosures as a result of people losing their jobs. This next foreclosure wave is reported to be larger than the last peak. Logic would tell you, that this larger foreclosure wave could drive prices down further and could very easily reverse the tentative confidence that is out there and this support extending.

d – Elections are coming this fall. Keeping positive momentum is a prime importance to getting reelected. Need I say more…extend if you want to have any chance of being reelected.

e – Local banks are still hurting and have not yet worked through the next wave of commercial loans coming due over the next 24 months. While these loans are not directly connected to residential housing, having “for lease” and “for sale” signs on every other commercial and retail building is not a confidence builder. The owners of these buildings also own homes and could trigger a third, but smaller foreclosure wave. Seems like the answer is extend, doesn’t it?

f – If interest rates are not held down, home buyer tax credit will lose its affect. Experts tell us that the unprecedented government borrowing will either force rates higher or drive up inflation. It seems both if these things are in check for the time being, but the home buyer tax credits will not have much affect if rates move higher.

The way I see it there are three possibilities with regards to the home buyer tax credits; two are neutral or positive and one not neutral or negative in terms of impact to the real estate market.

First, there is the possibility that the home buyer tax credit motivated undecided home buyers off the sidelines who would have already purchased in a normalized market. The fact these buyers have been moved from inaction to action means that demand has been generated where there was none. These home buyers being moved off the sidelines into the real estate market can be part of creating a positive real estate environment for which other home buyers are motivated to move off the sidelines too.

Second, there is the possibility that people are going about their normal daily lives and just taking advantage of the tax credits that are available. Young adults graduate college, get married, have babies and buy houses. People are transferred to different locations. People situations change and cause the need for housing changes. All of this is a natural occurrence in the American culture regardless of the economy. These home buyers coming into the market would indicate that the home buyer tax credit did not generate any new demand, but did not necessarily hurt the real estate market either.

Third, there is the possibility that the home buyer tax credits have pulled in future home buyer demand to the present. This is problematic because it means that once the tax credits go away, we will see a drop off in activity. The past loose credit and lending practices and low mortgage rates had the affect of pulling future home buyers into the present (at that time) and is in part the reason for the real estate downturn. Everyone who wanted a house had one and even many people who should not have been in a house found themselves owning one.

The problem with free markets being manipulated by the government is it has unintended consequences. Those consequences can be negative or positive. If the news of housing prices moving up, listings being sold and real estate activity is normalized creates confidence and induces other home buyers into the real estate market that is a good thing. Conversely, if the government intervention creates a “bubble” of sorts that bursts when the intervention stops, then the unintended consequence could be far worse than had the intervention not occurred. The main question is, where are we now?

Let’s take a little quiz. Who really benefited the most from the federal tax credits anyway?

A. First Time Home Buyers
B. Existing Home Buyers
B. Realtors
C. “To Big To Fail” Banks
D. All of the Above

HINT: Who gets the $6,500 or $8,000?

It doesn’t take rocket science to figure out that the tax credits were created to help those “to big to fail” banks. If you think it was to help us little people on “Main Street” you are watching too much TV. The Fed and those in Washington bailed out the “to big to fail” banks and continues to do so. It is called the Home Buyer Tax Credits.

The nations largest mortgage lenders are still awash in foreclosures that need to get moved on down the road (e.g. “sold”). In all but rare circumstances those tax rebates are being used in the purchase of a new home and part of the purchase proceeds (e.g. goes to the seller). Who is the primary seller of real estate these days…you got it “The to big to fail” banks. Yes, it benefited some home buyers and the local real estate communities; and therein lies the question. Washinngton is focused on helping the “to big to fail” banks, but there have been some unintended consequences; people on Main Street are actually being benefited too.

I am starting to sound a little bitter (read disclaimer Part#1), but the question remains extend or not to extend? Is it better for the health of the real estate market to continue with credits through the end of the year or cut it off April 30th?

Home buyer tax credit; extend or not to extend? That is the $6,500/$8,000 question.  What do you think? Should there be another extension of the first and existing home buyer tax credits?

First of all, let me first disclaim that I am not a big believer in government intervention into free markets. Secondly, I have been affected by the policies of the last two administrations, so I am not sure I can be completely objective, but with that in mind here goes.

Ask anyone in the real estate business about how severe the real estate down turn was and is. A debtor attorney friend of mine refers to it as a “real estate depression”. As one who has lived through the last three years of real estate hell, I have seen real estate values plummet and lots of real estate friends of mine loose everything. Thousands of builders, realtors, mortgage brokers, title companies, material suppliers, hard goods suppliers and sub-contractors have either been wiped out or are barely hanging on, and this is just in the Twin Cities area. Multiply this scenerio across the country and you start to get the picture of the severity of what happened.

I was told recently by a farily reliable source that a certain major bank is sitting on nearly a thousand of foreclosures in the Twin Cities market for fear it will just drive prices down further. I can verify that this is true in my small sampling of lisitngs I have been tracking. I have seen a number of bank foreclosure listings expire that are still sitting vacant for six months or more. During meetings with various local banks I learned many local banks are sitting on a ton of real estate related assets they don’t have a clue what to do with. Much of the damage has been done…or has it?