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A tax-credit program to lure new home buyers might live on - along with debate about its merits

This article first appeared in the St. Louis Beacon, Sept. 30, 2009 - After holding out longer than he originally planned, Dan McCoy finally bought his first home in June for $172,000 -- a four bedroom in Clifton Heights that had been on the market for roughly a year, during which the original asking price dropped by more than $35,000.

Rather than buying a house in the summer of 2008, McCoy, 28, and his wife, Diana, 27, decided to rent a year longer in the Central West End and save for their big purchase. During that time, not only did property values drop but a new incentive caught their attention: an $8,000 federal tax credit for first-time homebuyers that went into effect earlier this year.

McCoy amended his 2008 federal tax return and has already received the government check. He used the money to help pay for a home-renovation project that involved knocking down the walls of a bedroom to build a new bathroom.

"We certainly were able to buy a nicer house, and we wouldn't have been able to put in a new bathroom and buy new furniture or appliances if we didn't have the money coming in," said McCoy, a project manager for a hotel consulting and appraisal company.

The American Recovery and Reinvestment Act of 2009 authorized the tax credit of 10 percent of a home's purchase price up to a maximum of $8,000 for first-time buyers with qualifying income levels who have never owned a home or have not bought one in the last three years. More than 1.4 million people have taken advantage of the tax benefit, according to the Internal Revenue Service. 

The tax-credit program was a small piece of broad housing rescue legislation passed by Congress in mid-2008.  The first-time buyer program has since been changed so that those receiving the credit don't have to repay the money. The benefit cap was also raised from $7,500 to $8,000. People earning more than $95,000 a year and second-home buyers are still excluded from the program, and buyers have to live in their house for three years or they have to repay the credit.

New homeowners can apply their anticipated tax credit toward housing costs immediately rather than having to wait until they file their 2009 income taxes, which is why McCoy was able to invest right away in the remodel.

Many in the real estate industry credit the program with helping the housing market recover after a dismal string of months. The National Association of Realtors estimates that the tax credit has accounted for 350,000 sales this year that would otherwise not have occurred.

Critics say the program is too costly to continue; it's already likely to cost the government roughly $15 billion, far exceeding the projected amount when the economic stimulus bill passed. Besides, add critics, much of the money is going to people who were planning to buy a home anyway. As McCoy's case illustrates, it's not so easy to prove the extent to which the tax credit is spurring sales.

"Buying a house is something we probably would have done anyway," McCoy said. "But it's hard to say. It's one of those things where if prices hadn't been down, and we didn't have this eight grand, who knows, we might have started looking and decided to wait another year."

The tax-credit program is set to expire on Dec. 1. Some lawmakers -- and the realtors' group -- want to extend the tax credit for another year, increase it to $15,000 and allow any buyer who remains in a home for at least two years to be eligible.

The Tipping Point?

Merry Dahms, a Realtor with RE/MAX Results, said she would like to see the tax credits extended, but she would like the decision to be made closer to the program's expiration date. "The deadline is what gets people moving," she said.

That was true for David Woodruff, who bought a 2,700-square-foot Tower Grove East home in May, just weeks before the original deadline for taking advantage of the tax-credit program. "It certainly lit a fire under us," Woodruff said of the cutoff date. "Eight grand is a pretty big chunk of change."

Woodruff and longtime girlfriend Tiffany Ellis, who are first-time home owners, had been eyeing real estate for several years. Because of the recent drop in home prices, they were able to look for property this time around with a much larger footprint. (In addition to their lot, they own the lot next to them.)

And they are working to decrease their environmental impact. Woodruff and Ellis are receiving tax credits for making the home more energy efficient, and they are also using a government loan that's intended to help owners rehab and repair single-family properties. Woodruff said he is glad to see other young people also buying in the area.

Ron Gorman, a Realtor with Coldwell Banker Gundaker, said more than half of his clients these days are people looking to buy their first homes. That group typically accounts for a smaller portion of his business. He credits the tax-credit program, along with reduced home prices and low interest rates, with getting more young people interested in making their first home purchase.

"A lot of people who have been sitting on the fence wondering if prices will go down further are realizing that the biggest declines are probably behind us, prices are leveling off and the tax credit is a huge plus that can be the tipping point," he said.

Dahms said two clients who are first-time home buyers recently told her that the tax credit is what pushed them to enter the market and eventually accept a deal.

A recent surveypublished by the real-estate site Zillow.com indicates that extending the credit program would spur hundreds of thousands of sales that wouldn't otherwise take place -- at a cost of roughly $15 billion. The survey asked prospective first-time homebuyers how an extension of the $8,000 tax credit would influence their decision to buy a house in the next year. Of those who intended to buy a home, 18 percent said the credit would be the "primary influence" in their decision, 27 percent said it would be a "significant influence" and 27 percent said it would have "some" influence.

Raising the credit's income eligibility limit

Still, Dahms said, the program's impact has been limited by the inability of prospective first-time buyers to take on a hefty financial commitment. Many of them are worried about losing their job or have no job. Unemployment rates among young people remain higher than that of other age groups.

"We'd see more of a stimulus if we had a higher income cap or no cap at all," Dahms said. Gorman said he agrees that allowing more people to take advantage of the tax-credit program would help the housing market.

Jack Strauss, an economics professor at Saint Louis University and director of the Simon Center for Regional Economic Forecasting, said he supports the program being extended for six months to prevent a backslide in the market. "Overall, it's probably been a good thing," said Strauss, who emphasized that the program is only one piece of rescuing the housing market. (He added that more is needed to help stem foreclosures, for instance.)

But Strauss said the income cap is justified. It would cost too much money to offer the program to all home buyers, he said, and it's not practical to offer tax breaks to people who would have bought anyway or won't see the extra money as substantial.

For the lower-income people who are taking advantage of the program, Strauss said, "$8,000 is a lot of money, while it's a handout for higher-income people who don't need it.

"A lot of people would say the program [in its current form] didn't affect me because I already own a house," he added. "It does help them because it helps put a floor on housing prices. The only way to (stop) the slide is to have new entrants into the market" rather than primarily people who already own a home buying a new one.

When the program was introduced, Strauss said, housing prices were falling fast (though he notes that the St. Louis market didn't have as far to fall as others), and renters who were looking to buy had an incentive to wait to see when the housing market would reach bottom. He said the temporary window on the tax credit encouraged new buyers to act quickly.

"For the market to improve it's important for new buyers to soak up the existing excess of new construction," Strauss said. "Otherwise the net effect is zero."

Too Soon to Tell?

William Rogers, assistant professor of economics at the University of Missouri-St. Louis, said it's still too early to know whether the program has been effective. Not until the cutoff date passes and more housing data are reported will economists get a more complete picture, he said. Even then, housing experts will argue over whether the forecasted sales figures for first-time buyers were realistic, and to what extent an increase in expected sales was due to the tax-credit program or other factors.

Carlos Garriga, a senior economist for the St. Louis Federal Reserve, agrees that it's hard to assess the program with data that only cover the first two quarters of 2009. Garriga agrees with Strauss that the true test is whether first-time buyers are buying new homes that otherwise would have sat empty.

Early indications are that 35-and-under home ownership rates remain low, Garriga said. His impression is that young first-time home buyers still view taking on a large investment as risky, given the shaky job market.

Preliminary data suggest that the effects of the federal tax credit "are likely small, and that any modest improvement in the market might not be due to that policy," he said. "People who were going to buy, they'd probably buy anyway, so the effect on the margins is likely going to be small. I'd be shocked if the program had a big impact" in spurring sales that otherwise wouldn't have taken place.

Garriga said he isn't in favor of additional subsidized-housing programs, but that if "we view as a society that we want to help people get into homes, why not make sure the resources go not necessarily just to new home buyers but to the people who need it most -- the people who can't make their monthly payments."

Rogers agrees that the program is "too small to have a very large impact" in the overall housing market. He said he sees a problem with pushing too hard for home ownership. While there can be benefits to owning a house, there are also costs, particularly during a time of job losses. "If you're a home owner, it's more difficult to move out of an area that may have low levels of employment," he said. "Before the crisis, home ownership was being pushed too hard among low-income households, and I'd still be cautious about promoting ownership now, which is why I don't think [the federal tax credits] should be extended."

A Statewide Program Offers Up-Front Help

Rogers said programs that typically work best in promoting long-term ownership are the ones that give new homeowners help affording their down payments. "For people who have equity in their house, foreclosures are almost nonexistent, and people tend to invest more," he said.

That's the idea behind a tax credit advance loan program run through the Missouri Housing Development Commission. The commission offers buyers taking advantage of the federal credit a second mortgage at the time of closing that's worth up to 6 percent of the home purchase price or a maximum of $6,750, which is used to cover down payment and closing costs.

The tax credit advance loan is paired with commission financing for the first mortgage. The buyer then files for the federal tax credit and uses the refund to pay off the MHDC tax credit advanced loan. If the tax credit loan is repaid by next summer, there's no interest other than a servicing fee. If it isn't paid by that time, home owners are put on a 10-year repayment plan.

Greg Spurgeon, single family homeownership administrator with the MHDC, said 1,125 households have reserved roughly $120 million through the wide-ranging program. The average home purchase price for people in this group: $100,000.

The MHDC offer started in January, and home buyers have until Oct. 15 to take part in the program -- unless Congress extends the federal tax-credit initiative.