By WSJ Staff
Nick Timiraos and James R. Hagerty report:
http://blogs.wsj.com/developments/2009/10/29/qa-the-home-buyer-tax-credit-extension/
The Obama administration blessed the proposed extension of the $8,000 tax credit for first-time home buyers on Thursday as the Senate neared a compromise that would extend the credit to more potential buyers.
Here’s a primer on who might be able to get the expanded credit, and what it might do for the housing market:
Who gets the credit, and how much can they claim? First-time home buyers are eligible for up to $8,000 on the tax credit, which is the same as the current credit. The Senate version of the bill creates a new credit of up to $6,500 for homeowners who have lived in their homes for five years. That provision would start on Dec. 1.
How long will it last? The tax credits would expire on April 30, 2010, but home buyers under contract by April 30 would be able to qualify as long as they complete the sale within 60 days. Keep in mind, this would be the third iteration of a home buyer tax credit that has been in place since mid-2008. Sen. Johnny Isakson, the Georgia Republican who has been a staunch advocate of the credit, promised that this would be the “last extension” of the credit, according to Dow Jones Newswires’ Corey Boles. “Tax credits like this only work by creating the sense of urgency to take advantage of it,” Sen. Isakson said.
Will the tax credit do anything for the high-end of the market? Probably not. The tax credit phases out for home buyers with incomes above $125,000 for single filers and $225,000 for married couples. Also, homes that cost more than $800,000 aren’t eligible for the credit. Overall, the tax credit is likely to generate only a modest further increase in home sales, says Tom Lawler, an independent economist in Leesburg, Va. For many well-paid people, he says, it won’t make a big difference: “A household earning around $150,000 is likely to buy a home of $500,000 plus, so a $6,500 credit won’t be much of a factor in pushing such households off the fence.”
What other limits does the credit have? Toddlers are out of luck. Last week’s congressional hearings spotlighted concerns about misuse of the credit, including some 500 tax filers under age 18 who had claimed the credit.
So will the expanded tax credit help sales? That’s a point of debate among housing analysts and economists. Alec Phillips, economist at Goldman Sachs, notes that expanding the credit to people who already own homes doesn’t necessarily make a big dent in the supply of housing on the market. “If these ‘step-up’ buyers already own a home and sell it to finance the new one, that hasn’t reduced the amount of inventory for sale,” he says.
But Mark Zandi, chief economist at Moody’s Economy.com, thinks the extension is a big deal. Based on a preliminary analysis, he said it should mean at least 500,000 in additional sales, atop the 400,000 he estimates already have been generated by the tax credits (twice the Goldman estimate). “The tax credit is not a very efficient tax cut, but not extending it would do significant damage to the still fragile housing market,” Mr. Zandi said.
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