July 2010's miserable residential real estate sales have, once again, renewed fears of a double dip recession and more trouble ahead for the housing sector. In many parts of the country, the end of the $8,000 First Time Home Buyer Tax Credit at the end of April created a sales bubble that resulted in sales in July down 27% year over year: hitting historically lows.
As this is an election year, the government and our representatives now trying to come up with ways to reverse this trend quick. One such way is to revive the home buyer tax credit again.
While I thought this was just political fodder, it has now become a campaign talking point among those seeking higher office like Florida Senate candidates Charlie Crist and Kendrick Meek.
Since the tax credit funds were unable to be used for down payment assistance or closing costs, the $6,500, $7,500, and then $8,000 credits went to people who would have purchased without the aide of the tax credit. They did so early to take advantage of the government giveaway much like a Black Friday sale. Therefore, extending the tax credit would only help sell a few more homes now but create an even larger void down the road.
While we like to think of economic things as bubbles, I would say that this is more like a snowball gathering momentum on a slope. The more it's pushed, the larger it gets and then the faster it becomes until it becomes an avalanche.
So what then? Is it best to just let the market run its course?
The only way to correct the housing sales and foreclosure problem is to get people back to work. Today, I'm helping many more sellers that are out of work, relocated for work, or suffered a substantial job loss than those that have just chosen to walk away. With an unemployment rate between 11 – 16%, employment and underemployment is our biggest challenge. Some tax credit recipients used $8,000 to pay their mortgage while they continued hunting for a job after being laid off.
Next, we need to bring new home buyers into the market place. We cannot solve a housing crisis by selling homes to people who are going to buy anyway. This means bringing back seller down payment assistance programs like H.R. 600 and not limiting the amount of seller paid closing costs on a FHA, VA, or Conventional loan.
Before you jump all over me in the comment box down below, consider first that the FHA currently allows buyers to purchase their homes with only $100 out of pocket (it's a bit more complicated than that but that's how it's sold), VA allows for 100% financing, and many state Housing Finance Agencies will pay the closing costs for cash strapped buyers through a silent second mortgage that is forgiven over time. The USDA rural development program also allows primary residence holders with limited incomes to purchase a home for no money down.
The government is already doing this for middle and lower income buyers and insuring the loans at all of our collective expense. So then why is it wrong for me, as a homeowner, to do the same thing?
If I'm fresh out of college and want to purchase a house now that I've obtained a job, I must first save the 3.5% minimum down payment (or get it through mom and dad) before I can enter the housing market. If I am a homeowner that needs to sell, I would gladly pay the 3.5% plus closing costs to get my home sold.
Won't the home buyer just walk away if prices fall with no personal skin in the game? The vast majority don't because having good credit and not defaulting on their mortgage means something to them. Homeowners that strategically default on their mortgage (intentionally walk away) face judgments by their lien holders, ruined credit, and the loss of any available credit. For most homeowners, that's not an option.
This seems like a win-win-win for every party involved.
Do you agree with me? If so, please take a minute to call, fax, and email your favorite Representative and Senator and tell them to bring back seller funded programs like down payment assistance. For your convenience, I have linked to Project Vote Smart to help you find who you need to speak with. Next, contact NAR president Vicki Cox Golder and your state associations, and the RPAC representatives and tell them to stop supporting this failed legislation.