Guest Post: First-Time Homebuyer Tax Credit Program: Morally Hazardous?

The following is a submission by reader Kalpa who writes Financial News Express.

While traveling this past weekend, I picked up a real estate booklet in the charming middle-of-the-U.S.A. town which I found myself in.

Most interesting was the inside cover page note to prospective home buyers:

Firsttime homebuyers who would otherwise qualify for the $8,000 tax credit, but don’t have the money for a down payment or closing fees, may now be able to get a loan to help cover those upfront costs.

The U.S. Department of Housing and Urban Development (HUD) announced in May that the Federal Housing Administration (FHA) will allow state housing finance agencies to provide second mortgagesmonetizingthe tax credit so that borrowers can use the funds toward their down payments and closing costs for the purchase of homes with FHAinsured mortgage loans.

This is great news for thousands of families who want to take advantage of today’s low interest rates, competitive prices, great selection and the federal tax credit that is only available until Nov. 30, but could not save enough money for a down payment and closing costs,” said National Association of Home Builders Chairman Joe Robson.

HUD also announced that FHAapproved lenders may purchase the tax credit from the home buyer in advance, so the home buyer can use the funds for closing costs or to make a down payment in addition to the 3.5% minimum. Home buyers who go directly to FHAapproved lenders will still need to come up with the 3.5% minimum down payment that is required for an FHAinsured loan.

The National Council of State Housing Agencies has a list on their website ( of state offering firsttime home buyers tax credit loan programs. For information on the $8,000 firsttime homebuyer tax credit, go to

Now, admittedly, this is old news, and is dated June 11, 2009. But sometimes it pays to step back and look at what has just happened and is happening. We just had a near meltdown of our entire economy. It was largely caused by a housing bubble from lax lending standards and low interest rates which in turn caused irrationally elevated home prices. SIVs and other quantcrafted ponzi investment bubbles took advantage of this inflated housing loan industry.

You can’t solve a problem by doing more of the same things that caused the problem in the first place. How many times have you heard that now?

In response to the crisis, it didn’t take long for our government to establish this program which promoted further lending with no downpayment to young new workers who, sorry to say, are at highrisk for default. Since when are people who owe no taxes eligible for home loans and $8,000 credits? Add kerosene to the fire.

I am personally acquainted with one couple who has purchased a newly constructed home under this plan. They are 25yearold newlyweds who are both employed in the service industry, one as a hairdresser and the other, a lawnservice and snowremoval provider. This also makes me recall that I considered buying a condominium when I was in my 20s but after finding out that there was a required 20% down payment, I quickly gave up the idea. In retrospect, I realize that the lending standards then, in the 1980s, were written in my favor. I didn’t need to become a debt slave in this period of my life when I still needed freedom, mobility and income for other expenses.

So, above, is the promotion of the first-time home owner tax credit plan when it started. Below, is the report of the results of the program and a promotion for its extension in a bigger and better way:

First-time homebuyer tax credit claims soaring

More than 1.4 million Americans have already claimed the new tax credit for first-time home buyers, according to a report from the Internal Revenue Service.

The credit, which applies to sales as of January 2009, is good for 10% of the price of a home, up to $8,000, and supporters assert it has helped stabilize the housing market. It’s available to anyone who has not owned a home for three consecutive years prior to purchase, and to qualify for the full credit buyers must be purchasing a primary residence, and couples can earn no more than $150,000, while individuals must make less than $75,000.

The credit has been an important stimulus tool for two reasons. It’s fully refundable, meaning that even if buyers owe no taxes whatsoever, they’ll get an $8,000 check from the IRS. And this refund will put money in consumers’ pockets for good, as opposed to the $7,500 first-time homebuyer tax credit that could be applied to sales made between April 2008 and July 1 2009.

Buyers must close on their homes before Dec.1. But because much of the recent uptick in home sales has been attributed to this tax credit, housing industry advocates worry that the market could quickly turn down again after the credit expires.

“Just like the Cash-for-Clunkers program, there could be a hangover effect,” said Mike Larson, a real estate analyst for Weiss Research.

That’s why housing industry participants are pushing Congress to keep the tax credit in place.

“We’re calling for extending the credit until the end of next year and expanding it to all homebuyers,” said NAR spokesman Walter Molony. “We do think that housing will recover without it but the market will come back faster and stronger with it.”

Some 1.8 million people are expected to participate in the program by the time it lapses and the National Association of Realtors (NAR) estimates that it will result in an extra 350,000 sales. The NAHB more conservatively predicts 165,000 more home sales than would have occurred. The associations don’t want that momentum to slow. The associations don’t want that momentum to slow.

“If we don’t extend and expand the program, the seeds of growth planted could [die],” said NAHB president Jerry Howard.

There are six bills before Congress that would extend the tax credit, two in the Senate and four in the House of Representatives.

On Wednesday night, Senator Ben Cardin, D-Md., along with Senators John Ensign R-Nev., Harry Reid, D-Nev., Johnny Isakson, R-Ga., and Debbie Stabenow, D-Mic., introduced a bill extending the tax credit program for six months.

Reid released a statement saying, “Yesterday we learned that new home sales have increased in Las Vegas, and that’s good news. I hope this credit will build on that so more Nevadans can realize the American dream of home ownership.”

Senator Isakson, a former real estate broker himself who has become a leading voice on housing market issues, had introduced his own bill several weeks ago. That would not only extend the credit for a year after it’s renewed, it would allow all homebuyers, not just first-timers, to claim it, as long as the property is for a principle residence. The bill would also increase the tax refund to as much as $15,000.

The house bills all extend the deadline through at least the end of December 2009 and two of the bills, introduced by Howard Coble, R-NC and by Dan Burton, R-Ind., would have it run through 2010. They would also open it up to all homebuyers.

Sentiment backing efforts to extend the credit appears to be on the rise, according to Jaret Seiberg, an analyst with Concept Capital’s Washington Research Group. He put the odds of an extension at 2 to 1. Isakson’s version has already attracted 16 co-sponsors, according to his deputy chief of staff, Joan Kirchner.

[…] Another hurdle: The growing sentiment among fiscal conservatives that any extension must be paid for by finding savings in some other areas. There has already been $14 billion allocated to the program — and any extension would surely cost billions more. […]

This above article explains how the starving tentacles are reaching out in a big way for more, more, more. It has been estimated by Calculated Risk that the true costs of the program have been $ 43,000 per tax credit instead of the $8,000 face value. We also know that the benefits go to the banks and help keep home costs higher, which is not desirable for the consumer. It helps protect the CDO values that the banks have on their books. It helps the construction industry sell new houses, as well as helping realtors and loan originators.

This program is, on the surface, politically palatable because it appears to be for the little guy until you look deeper. Then it becomes absurd, more of the same, difficult to end, and morally hazardous in quite a number of ways.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. Max

    Yes, hazardous, but hardly matters in the greater scheme of things. They can’t prop up the housing to the previous highs in real terms, and they know it.

  2. donna

    A friend of mine’s niece is a hairdresser and her fiance is a floor layer. They live in a 600K house with a 5K a month mortgage. Yeah, they are close to defaulting. In what world was it at all sane for them to buy that house?!

  3. Gabe

    It has been estimated by Calculated Risk that the true costs of the program have been $ 43,000 per tax credit instead of the $8,000 face value.

    This isn’t correct. CR calculated the costs of the program are $43,000 per additional house bought because of the program that wouldn’t have been bought otherwise, NOT per tax credit, which is still $8,000.

    The way you phrase it makes it sound like the cost is actually more than 5 times higher than we think it is. Not true, the cost of the program is still the same. CR’s analysis was meant to show the benefits of the program aren’t as high as one might think.

  4. cc

    I am curious if I am the only one reading this and saying to myself ” don’t we all know this already?” No disrespect. Maybe I am wrong but it seems we all know the so called recovery in the low end of housing is totally being paid for by the government. There is so much money going to public housing agencies from the stimulus bill to help or completely pay for homes for low income people. 80% of medium income. Just search on public housing or community development action agencies etc.

  5. DownSouth

    Here’s a story about a young couple who took advantage of the $8k tax credit last spring to buy a $171,000 condo in Dallas.

    But here’s the part I found most intriguing: “Two weeks ago, the price of the unsold units was cut 10 percent.”

    Phew! That $171,000 unit is now selling for only $153,900.

    I guess that took care of the $8,000 credit, plus $9,100 more.

  6. A.S.

    Here is another example of “nothing ever changes”, published September 17th in Businessweek

    Full story:

    …..Builders and lenders are dusting off a familiar pitch: mortgages with $0 down and 100% financing. The deals, which take advantage of a little-known loan program at the U.S. Agriculture Dept., are bolstering sales in some areas……
    The government-backed loan program is buoying builders and lenders. Analysts say federal loans, including those guaranteed by the USDA, accounted for 64% of sales at builder D.R. Horton (DHI) in the latest quarter. In Port St. Lucie, Fla.—a coastal town littered with foreclosures and empty subdivisions—roughly one in five mortgages is coming through the Agriculture Dept., according to local industry players……..

  7. wintermute

    “You can’t solve a problem by doing more of the same things that caused the problem in the first place.”

    I have a theory about this. About why FHA & FHLBs are taking over the ninja fog-a-mirror lending standards seen by Countrywide and Wachovia before the housing crash.

    Reason is: the Fed/Treasury/White House want to engineer a soft-landing. They know it is madness to continue the same way as before – but they hope to “detox” the FIRE economy like an addict detoxing via methadone.

    They think cold turkey = systemic crash.

    Probably they are wrong – but probably does not mean definitely.

    1. Siggy

      Where did/does the $8,000 come from?

      Where’s the moral hazard? Hell, that was forgotten as soon as the poltroons who control Congress determined that the body politic was in an ugly mood and just might vote them out in 2010.

      This is simply sub-prime lending in another form. Any Representative/Senator who voted for this piece of pork should be voted out as soon as possible.

      There’s a part of the solution, VOTE THE BASTARDS OUT!

      1. Brad

        Why do you call this another form of sub-prime lending? I’m not questioning you; you might be right. I’m just not sure why. Can you, or someone else, please explain in detail why this would be considered another form of sub-prime lending? I want to take this to my real estate class.

  8. Robert

    It is truly a horrible to encourage people to pay for a depreciating asset that they can barely afford. Let’s look at the Cash for Clunkers program. Assume roughly 30% depreciation over the first 3 years of ownership, this program has removed about $7.5 billion in equity from the consumer balance sheet. Now, we have low down-payment programs aimed at housing. In particular, low-experience first-timers who by definition are over-paying for their home. They are encouraged to purchase more square footage that is needed and probably buying newer construction in poorly established neighborhoods designed for continued price depreciation. The benefit of the $8K credit is totally ameliorated with a 5% further decrease in home prices. It’s very sad for the gov’t to encourage debt in this way among the most vulnerable.

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