Fritz Pfister

In 2008 the Bush administration implemented a $7,500 tax credit for first time home buyers. Although well intentioned the proposal has had little impact upon home sales in Springfield Illinois, and probably across the nation. Why? The money had to be paid back, and was limited to only first time buyers of homes.

The reason our economy is in a tail spin is due to the federal government under Clinton ordering Fannie-Mae, Freddie-Mac, and HUD to make home loans more affordable for low income families. Prudent lending guidelines were abandoned, banks made the loans because Fannie/Freddie would buy the loan which was then packaged as securities and sold to Wall Street investment firms. The plan worked fine until the housing bubble burst, prices began falling, and you know the rest of the story.

I did not promote the $7,500 tax credit to my clients because I didn’t deem the program to be in my clients best interest. It seemed to me to be an instant gratification tool, similar to what got so many other people into trouble, that my clients may suffer from down the road. My clients could have utilized the rebate toward down payment, getting the home now, however they would have to repay the money to the government.

My experience tells me that no one knows what the future has in store. On many occasions my clients have told me, when being advised the home they want to purchase is over priced, that the client didn’t mind because they were going to live there forever. Then a few years down the road these very clients circumstances changed, and they had to sell. Invariably they lost money.

In my opinion the same would have happened if they depended upon the $7,500 rebate as their equity to purchase, but then had to sell. Uncle Sam would be at the closing table with hand extended to collect the balance owed on their $7,500 (loan) rebate.

Consider the current market conditions in Springfield Illinois as an example. Without question one of the most affordable markets in the country with a median sale price of $104,000 in 2008. Here’s the problem, it is affordable because there is a low annual rate of appreciation under normal market circumstances. These are not normal market circumstances. Prices are falling. Prices fell the second half of 2008, and through February 6 closed sales have the median sale price down 10.5% to $89,500 year to date in 2009.

What if my clients purchased a home using the $7,500 rebate and had to sell in the next couple of years? First their home may not be saleable at the price they purchased the home, if prices continue to fall. Scores of home sellers in today’s market, who purchased during the sellers market at high prices, are finding they can’t sell their home for the price it was purchased. I have documented dozens of sales from 2008 where homes sold for $10,000, to $80,000 less than the previous purchase price.

My clients would have to pay closing costs, broker fees, and pay back Uncle Sam from the gross sale price. Would these clients that didn’t have any money at the time of purchase be in a position to bring over $10,000 to closing to cover the mortgage payoff and all the expenses? Probably not, and another home would go back to the bank with the Federal government holding the bag, for you, citizen taxpayer to make whole.

Limiting the program to first time home buyers was also a mistake, if the goal was to stimulate home sales. A move up buyer selling an existing home would likely be in a better position to utilize the $7,500 rebate now, without as great a risk as in the previous example of a first time home buyer. Should the client that utilized the $7,500 for a move up purchase have to sell in a couple years, equity build up from previous homes would probably cover any deficits, and not leave the taxpayer holding the bag on another loan gone bad.

Nobody knows the details of the Senates $15,000 tax incentive for home buyers in their version of the stimulus proposal. The House and the Senate will still have to agree upon a final bill, and this $15,000 home buyer tax incentive may be eliminated. The one detail we know is that it would apply to all home buyers, however we don’t know if the money would have to be repaid.

In my opinion, if a $15,000 tax credit were given to home buyers, without any repayment provision, it would be a legitimate stimulus for home sales. Interest rates on mortgages have ticked up a little at the beginning of February, however remain at near historical lows at just above 5%. Combine low interest rates with, falling prices, and a tax incentive to buy a home, and there would be a jump up in the number of home sales.

The key, however is jobs. If people aren’t working they can’t buy a home, or pay for the one they own. In this vicious cycle, it should be noted that if home sales increase, so will the number of people maintaining or getting jobs. The dilemma is there are many families that would make a move up if they could sell their current home, and that is the importance of the first time home buyer which starts the dominoes falling for move up sales.

My recommendation would be to add to the stimulus proposal in addition to the $15,000 tax incentive without repayment provisions, the reinstatement of down payment assistance programs such as AmeriDream. When the bailout bill was passed, the legislation eliminated down payment assistance programs which were not a part of the problem that caused the financial meltdown, and has cost 25,000 home sales nationwide every month since October.

These programs, run by non-profit organizations, were for credit worthy buyers that simply couldn’t earn enough to save a down payment, however could afford the house payment. The assistance comes from the home seller gifting 4 to 5% to the non-profit who in turn gifts to the buyer down payment for an FHA loan. This costs the government nothing. In the event the home had to be sold in the next couple of years, the risk was far less than the $7,500 rebate program, because the down payment was a gift. Congress threw out the baby with the bath water in this instance.

Nobody knows what the final version of the stimulus plan will look like. However this is a grand opportunity to help housing stem its’ downward spiral, which is what caused the financial crisis. Repair housing and the country will be on the road to recovery. Let’s hope the arsonists being sent to put out the fire act accordingly.

The opinions expressed are solely those of Fritz Pfister, and not RE/MAX Professionals of Springfield or RE/MAX International.