Home Buyer Tax Credit Critical

Home Buyer Tax Credit Critical

If all home buyers become eligible for a tax credit without a repayment feature, it could result in an additional 555,000 home sales – enough to meaningfully draw down excess housing inventory, according to the National Association of Realtors®.

An evaluation of options for a home buyer tax credit by NAR shows wide ranging implications and benefits. A full credit to all buyers means an additional 2.22 million households would meet the income requirements for purchasing a home, but only one in four of those households would actually make a purchase.1

Under the current $7,500 first-time home buyer tax credit, which must be repaid over 15 years, 264,000 households meet the purchase requirements. Using the same assumptions, with plans to hold their home for a median 10 years, it would mean only 66,000 additional sales.

Lawrence Yun, NAR chief economist, said NAR is advocating a tax credit for any home purchase meeting qualifying underwriting standards. “A home buyer incentive is critical to help reduce housing inventory and stabilize home prices,” he said. “The bigger the incentive, the faster housing can help pull the economy out of recession. The cost to the Treasury would be far less than the additional costs of a prolonged recession with insufficient housing stimulus.”

Analysis of other options shows that if only first-time buyers are eligible and the repayment feature is dropped, it could mean an additional 202,000 home sales. If extended to all home buyers but the repayment feature is retained, the gain would be 181,000 home sales.

NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth, said a flexible approach to the tax credit would have added benefits. “A home buyer tax credit also should be allowed to be used as a part of down-payment. This would instantly add an equity cushion for homeowners – a vested financial interest provides the foundation for sustainable homeownership, which helps improve economic stability,” he said.

NAR estimates only 25 percent of newly eligible households would become homeowners, and does not capture the effect of increased trade-up buying activity. As such, these projections may understate the full impact of a home buyer tax credit.

Projections assume a 5.5 percent mortgage interest rate; sales gains would be higher if interest rates remain below that level. A down-payment of 10 percent is assumed, with principle and interest payments not exceeding 25 percent of gross income.

According to the 2008 NAR Profile of Home Buyers and Sellers, both first-time home buyers and repeat buyers expect to live in their home for a median of 10 years – the longer a home is held, the greater the benefit under repayment assumptions.

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