Tax Credit Expires: Good Riddance!

Posted by urbandigs

Sat May 1st, 2010 08:32 AM

A: Its about time that the government's interference to prop up housing prices expired. It should never have been implemented in the first place. My experience with the past 3-4 week rush to sign contracts was mostly negative. I will put aside the fact that one tax credit motivated buyer client turned out to miss the deadline and 'disappear' in the last 24 hours after an accepted offer a week ago. I received about 6 phone calls over the past 3-4 weeks from first time buyers hoping to sign on the dotted line before the expiration. What worried me was that the only one which should have even considered buying in the first place, was also the one to vanish as the deadline passed. The others simply wanted to buy so as not to miss out on the governments handout.

I can't help but think about Ana Maria's recent discussion on shady clients. Looking back to the other 5 calls I got from first time buyers, none of them should ever have been considering buying a home in the first place. The only motivation? Buy before the $8,000 tax credit expires. This is the beast the government created and I say good riddance!

tax-credit.jpgThe funny thing is, there is no doubt in my mind that any of these five buyers would have been able to find a condo property and a lender to allow them to make the purchase. No doubt. And here is why:

  • The condo has a seller that wants to sell

  • The listing broker has a property they want a commission off of

  • The buyer's broker has a client they want to seal a deal with

  • The lender has a client they want to sell a loan to


    • And of course the usual fees and expenses of the rest of the businesses that are involved in any one real estate transaction. Doing deals makes money and livings and is in the interest of all the parties involved. Whether or not the buyer should ever be purchasing in the first place is not their problem; afterall, the buyer is an adult and is entitled to make their own mistakes right?

    This is where I have issues. The government policies created an environment that allowed housing to become a speculative asset class; winding down lending standards and increasing exotic products to expand affordability as the markets caused a psychological shift in the asset class. The end result was an engineered environment that allowed buyers who never should have been able to buy, to do so; along with hopes of a quick profit later on. We know what the engine of all this (wall street) did with these loans, and now we know the taxpayer basically assumed all the junk securities to keep the banking system from failing. A huge transfer of shit from the banks to the fed's balance sheet at the end of the day; totaling trillions of dollars. And now, we are doing it all over again!

    My experience over the past 3-4 weeks was more of trying to talk sense into first time buyers whose motivation to purchase was misguided. These buyers felt a pressure, a stress to buy. Can you believe that? They werent looking to buy the home as a utility or an investment. They weren't looking at the purchase as a luxury resulting from achievements in their careers, years of saving up for the purchase, and something that lines up with their current financial situation and needs. A few of them even mentioned to me they didnt care what kind of property they ended up buying! All they cared about was signing the contract by April 30th and closing by June 30th to get the $8,000 government tax credit! HOW INSANE IS THAT!

    Here is the rub: Given that we just went through a devastating collapse of the housing market and banking system, I don't see the euphoria being anywhere near levels that led to the initial crisis. However, if I alone got these calls I can only imagine how many buyers out there across the nation actually pulled the trigger to seal the deal only for this stupid incentive. Now I am not saying some rational buyers out there are stupid and bought for the wrong reasons. Not at all. At all times there are rational, savvy, and conservative buyers out there who are buying for all the right reasons and keeping their purchases well within their financial means. And those buyers got a nice bonus with this government incentive. No, I am talking about those buyers who have no reason buying at all and are only even considering it because they feel the power of the $8,000 tax credit is too good of a government gift to let slip through their hands. How many low quality buyers out there are making the same mistakes that led to the housing collapse in the first place? How many of these buyers are stretching their budgets because they feel rushed to buy prior to expiration and an expensive house is the only one that they liked on the open market these past few weeks?

    The tax credit, in my opinion, is doing four things:

    1) Pulling future demand forward - any buyer that was saving up for and planning to buy in the near future had incentive to pull the trigger earlier to take advantage of the tax credit. These were buyers that were going to buy anyway, and now are doing it at the government's expense

    2) Incentivizing low quality buyers to jump in - do not discount this irrationality amongst buyers! I have a hard time believing the banking system is responsible enough to say "NO" to a ready and willing buyer, that may not be 'able' to afford the home they just signed a contract for. If one bank says no, I'm sure the buyer will find another bank that says YES! And that may be motivation enough for the lender to do what needs to be done to get the loan through

    3) Artificially propping up housing markets - at the end of the day, this is a very weak foundation to support local housing markets on a longer term sustainable basis

    4) Increases the deficit / fraud - this is not free money, although it plays the role of it on TV. As of mid-March, some $12,450,000,000.00 worth of tax credits were claimed (via The Big Picture). Also, lets not turn a blind eye to those engaging in criminal behaviors to defraud the government on this program! From 4-yr olds filing for tax credits, to buyers claiming credits for homes that were never purchased, to other buyers who don't qualify but expect a handout.

    You can't make this shit up! But hey, it did make sales go up (albeit temporarily and stealing future demand) and it did prove to be one ingredient among many to reflate housing markets or at the very least, stabilize the hardest hit markets from falling further. To think there will be no unintended consequences from these types of programs is to have your head in the sand. To think banks smartened up and to say 'NO' to all un-able buyers, is to have your head in the sand. Buyers will do anything and everything to tweak a loan application to get it through underwriting and the mortgage brokers out there know how to advise clients as such. That is the world we live in, for better or worse. Gone are the days where a buyer is required to put down 20% of the purchase price, have sufficient post-closing liquidity, and strict employment history and salary as to keep total debt-to-income ratio's under a max of 33% or so. I know for a fact banks are lending to buyers with a d/i ratio of up to 45% these days. Simply amazing.

    Now begins the phase where we see the negative whiplash effects from the inverse stimulatory effects these government programs provided the markets. You can't have it both ways. After that the markets will learn to stabilize without government assistance programs - I wonder if the people will soon blame government for any future lull in housing as a direct result of removing these programs? Typical. I say, END THE SUBSIDIES AND GOOD RIDDANCE!

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