Pro & Con: Should Congress adopt a new tax credit for buying a home?

By Jessica D. Gabel

It’s official. The recession ended — more than a year ago according to the National Bureau of Economic Research. If you blinked, you probably missed it, but Wall Street and policymakers didn’t.

Back on Main Street, despite a slight uptick in August home sales from the July nosedive, the number of homes sold and the prices they are sold for remain at record lows. Georgia excels in foreclosure and bankruptcy filings — just last month we came in at No. 6 on foreclosure filings, and four Georgia counties earned spots in the Top 10 list of counties in the nation for bankruptcy filings.

The debate in Washington, however, rages not over the explosion in the number of people living below the poverty line but over whether we should extend the Bush tax cuts; tax cuts that largely benefited the higher income brackets in this country. The same supporters who cling to the tax cuts for dear life complain that the home buyer tax credit was a quick fix that failed to buoy the housing market for any sustainable period.

But our economic response to the collapse of the housing market is falling short. The government Band-Aids — a hodgepodge of mortgage modification and anti-foreclosure programs — are insufficient. And when something like the home buyer tax credit generates even a hint of improvement, we abandon it.

What we need is that same long-term investment strategy to apply universally. It should not be our policy to bail out only the few who fit the label “too big to fail” just because they have more money to lose. Ask anyone facing foreclosure next Tuesday at the Fulton County Courthouse how much they have to lose.

The American Dream no longer means owning a home. It’s simply holding onto the home that is the dream for so many. The home buyer tax credit is not just a mechanism that encourages people to buy homes. It also provides an out to those with oppressive mortgages by enlarging the buyer market. It’s also a benefit to banks that are hefting a portfolio of foreclosed homes in their wallets.

The reality is that banks are not exactly lining up to modify mortgages, and the deep pile of restrictions they have placed on refinancing makes it nearly an impossible option. The home buyer tax credit is not aimed at boosting home sales and prices back into the bubble. It’s just pumping some air into a market in need of life support.

Who pays for it? Taxpayers, of course. So forget the Bush tax cuts that fattened a few wallets. Trade it for the home buyer tax credit that affects more than just a line item on a tax return. Washington and Wall Street need to understand that putting and keeping roofs over Americans is a key component to our recovery. If we persist in a piecemeal approach to fixing the housing market, then we should expect piecemeal results. A double dip recession. A jobless recovery. And, regrettably, a homeless recovery.

Jessica D. Gabel teaches law at Georgia State University.

NO: It’s time to let supply and demand fix the housing market.

By Carter Doyle

There should not be another home buyer tax credit.

The U.S. government can only try to prop up an industry for so long. Then you must let markets do what they do — adjust via prices. Otherwise, when will it end?

We are just delaying the agony of adjustment. It is like the zombie banks that Japan propped up in their “Lost Decade.” Overcoming this denial and letting markets work is part of the solution, as painful as it may be.

After all, why are home sales so low? We were in a housing bubble and it burst. It is common in bubbles to go from extremely high levels of sales of the bubble asset to extreme lows after people come back to their senses.

The primitive emotion of fear is outweighing the greed sentiment. Totally the reverse from those good old bubble days.

Is the problem really that we need another $8,000 tax credit to improve home affordability? How much cheaper do houses need to be for people to buy them? Home prices have come down dramatically from peak bubble levels.

In some areas of the country, prices are literally a fraction of what they once were. Furthermore, mortgage rates are at all-time lows, barely hovering around 4 percent.

The drop in mortgage rates alone, from April 30 to now, translates into savings far greater — over the life of the mortgage — than the tax credit.

The real problem affecting housing is the supply and demand conditions.

On the demand side, consumers remain fearful about making a big ticket purchase. This fear is driven by the job market. If a person has not been laid off, they sure know family members or friends who have been.

And of course, there are always the rumors at work about cuts or furloughs. This uncertainty about the job market and incomes is keeping demand weak. It is not that houses are $8,000 too expensive.

On the supply side, builders overbuilt. Initially, home sales went through the roof through 2006. Housing developments popped up everywhere. Of course, these developments turned profits on the way up. Now we want to continue to socialize the losses. Builders do not need another $8,000 tax credit to sell houses. Instead, they need to look at providing incentives and lowering prices further to clear markets. Already, some have showed that they are very good at that.

So, we need to let supply and demand work and prices and inventory will eventually adjust. While an $8,000 tax credit may help some buyers on the margin, it’s likely they would buy a house anyway. Let’s face it, if a buyer needs that tax credit to buy a house, they probably cannot really afford it. That’s how we got in to this mess in the first place. And the nation is still in denial thinking a temporary tax credit Band-Aid is going to remedy this and prevent an adjustment from running its course.

Carter Doyle is a visiting assistant professor of economics at Georgia State University.

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