Summary
With the expiration date rapidly approaching, supporters of the tax credit fear that the housing recovery may stumble in the absence of this housing subsidy. Opponents believe that extending the program would be costly, expressing concerns about excessive government spending and a run-away federal budget deficit. They also believe that a tax credit program does not solve the problems of the housing sector; it only postpones dealing with those problems.
Analysis
Although opponents of extension offer a convincing case, I believe there is a stronger case to be made for extending the tax credit. The housing sector continues to be in a fragile state; home values on a year over year basis continue to fall, home inventories remain in excess, and a meaningful number of households either lack the confidence, financial wherewithal and/or credit/underwriting requirements to purchase homes. Not surprisingly, the tax credit program and the Federal Reserve’s mortgage debt purchase program (keeping mortgage rates near historic lows), combined to mitigate market problems, boosting home sales and pushing the housing sector onto a definite but wobbly recovery path. If the government were to pull back on these programs, the housing sector is at risk of taking two steps backward.
Extending the housing subsidies does a great deal more good than harm. The projected $15 to $17 billion cost of extending the tax credit program for another 6 months pale in comparison to what the costs would be if the housing markets go in retreat once again. According to most research studies, the housing sector influences about 15 to 20 percent of GDP growth. If housing activity stumbles, so does the appliance industry and the furniture industry, the building industry and so on. In other words, if the housing sector retreats so may the U.S. economy which could end up costing the American taxpayer a great deal more money than the cost of a six month extension.
There are a number of other points made for extending the tax credit but I have run out of space. Please go to Real Estate Economy Watch.com for further analysis.
David Lereah consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
