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As homebuyer tax-credit program nears end, questions about effectiveness remain

This article first appeared in the St. Louis Beacon, April 30, 2010 - It's down to the wire for Merry Dahms and her clients.

Over the last week, a flurry of potential homebuyers have contacted Dahms, a Realtor with RE/MAX Results, about signing a contract before the Friday deadline to take advantage of federal tax credits that provide up to $8,000 for first-time buyers or $6,500 for existing owners moving to a new residence.

Ron Gorman, a Realtor with Coldwell Banker Gundaker, said he's also expecting a rush of last-minute sales before the weekend.

"We've had people coming in off the street looking for an agent," Gorman said. "Some of them are seeing a house and signing a contract the same day. They want it in before the deadline."

While today is the deadline for having a deal in place, buyers have until June 30 to close on a home to qualify for the tax break.

The federal program designed to help homebuyers and awaken a sluggish housing market has gone through several phases. The tax credit for first-time buyers was a piece of wide-ranging housing rescue legislation passed by Congress nearly two years ago. It started as a $7,500 credit that taxpayers were expected eventually to repay.

But in the American Recovery and Reinvestment Act of 2009, Congress dropped the repayment requirement and authorized a tax credit of 10 percent of a home's purchase price up to a maximum of $8,000 for first-time buyers or qualified buyers who hadn't owned a home or bought one in the last three years.

The legislation prevented people who earn more than $95,000 a year from taking advantage of the tax credit. But in November, as part an extension of the program passed by Congress, the income limits were raised so that single home buyers who earn up to $125,000 and a married couple earning up to $225,000 could still qualify for the full benefit.

The extension still allowed first-time buyers to take advantage of the $8,000 credit, and it added the $6,500 credit for existing homeowners who sell their property (so long as they have been there for five years) and buy another one.

The U.S. Treasury Department has labeled the program a success. Last year, more than 700,000 taxpayers were able to buy their first home with assistance from the Recovery Act expansion of the First Time Homebuyer Credit, the department says. Overall, nearly 1.8 million people have collected $12.6 billion in tax credits to buy a home, largely due to the Recovery Act, according to the agency.

For obvious reasons, the program has also been widely praised by the real estate industry, which has been hit hard by the financial downturn. Many within the industry credit the program with helping the housing market stabilize after a gloomy period that saw month after month of declining home sales and prices.

Data from the National Association of Realtors show that after several straight slow months, existing-home sales rose nearly 7 percent nationally from February to March, as homebuyers sought to complete deals before the deadline passed.

Home sales last month were up substantially from a year ago. In the Midwest, for instance, existing-home sales were 15.5 percent above where they were in March 2009. The median price was $139,300, up 0.2 percent from last year. And first-time buyers purchased 44 percent of homes in March. The Realtors' group credits the federal tax credits for spurring many of these sales.

"It helped keep the housing market afloat," Dahms said. "I've had first-time homebuyers tell me that the $8,000 is what pushed them over the edge. There are people who wouldn't have been buyers otherwise."

Gorman said his business is "as strong as it's ever been," and he credits the tax-credit program for that boost. More than half of his clients are people looking to buy their first homes, and Gorman said the federal credits have been a necessary carrot.

"I definitely think the program has worked," he said. "A lot of people wanted to buy homes, and the $8,000 hanging in front of them was an incentive to do it now instead of waiting around. It hasn't just been with first-time buyers but also people who have lived in their homes for five years who are motivated by the $6,500 incentive."

Gorman said that some of his clients would likely have bought homes anyway, but "the momentum has been considerably upgraded because of the tax credit."

Critics of the federal tax credits, including some tax policy experts, maintain that the program hasn't been cost effective. They note that the majority of the $12.6 billion in credits were collected by those who would have bought anyway.

And the program has had its share of problems. An audit by the Treasury Department's inspector general released last year found that hundreds of millions of dollars in credits went to people who had not yet bought homes or who were not first-time home buyers, as the program initially required.

William Rogers, an assistant professor of economics at the University of Missouri-St. Louis, said he thinks overall that the tax credit was a bad idea. The program was designed to prop up mainly single-family housing prices by temporarily increasing demand and increasing consumer confidence, he said.

"However, the tax credit encouraged renters to become owners, which benefits one part of the housing market at the expense of another," he said in an e-mail. "This program was not designed to impact the total housing inventory or increase household formation."

Rogers said that while "sales rose for homeownership units and prices were higher than otherwise, when you look at how many people were already looking to buy in the first place, spending a lot of money to get a few people out of rental units and into new homes isn't cost effective."

After the tax-credit program expires, Rogers said, it's fair to expect a drop in home sales. If unemployment remains high, a limited number of people will be able to afford new homes, which means that the demand for new housing units could stay low, according to Rogers. "That means the housing market nationally could be sluggish for several years."

Gorman agrees that job insecurity is a major reason home sales could drop once the deadline for the tax credits has passed. "I think the economy is getting better, but the market is going to slow down without this impetus to get deals in right now."

Dahms fears that without another extension and expansion of the federal tax-credit program, sellers in particular will suffer.

"People who are selling in the price range where first-time buyers would look are slightly panicked right now," she said. "They say, 'If I don't sell before the deadline, then what?'"

Added Gorman: "Sellers realize that they need to get these deals done. After the end of April, they aren't sure when they are going to get their next offer."