Get $4 a Month to Help Pay Your Mortgage

Congress will spend billions on an untargeted, new homebuyer incentive, but can’t find $3.9 billion to help stabilize home values in heavily affected areas.

The fate of $3.9 billion in neighborhood stabilization funds, which would be targeted to communities heavily affected by foreclosures, has been caught up in the debate on Capitol Hill over the cost of the American Housing Rescue and Foreclosure Prevention Act—the omnibus housing package intended to stabilize the housing crisis. This emergency expenditure would be used to purchase vacant and abandoned bank-owned houses at a steep discount, rehabilitate them, and sell or rent them affordably. In the process of eliminating blight and reducing downward pressure on neighboring property values, rehabilitating these homes would also create 80,000 new jobs.

Yet these necessary and stimulative funds are at risk because of the Blue Dogs’ strict adherence to the “PAYGO” principle, which requires individual bills to be deficit neutral, or balanced by tax offsets. It is therefore unfortunate that other tax offsets were found for another widely popular but more expensive and less effective provision that is expected to survive. It will be a shame if Congress cannot find a way to pay for the neighborhood stabilization measures that will do the most to stabilize heavily affected communities.

Congress is prepared to approve a first-time homebuyers’ tax “credit” at a cost of more than $4.6 billion through the end of 2010 in an effort to stimulate the housing market. The credit is intended to stimulate demand among people who have never before bought property in the hopes that they will draw down the existing inventory of unsold homes, allowing the homebuilding industry to begin building again. Yet that credit will reduce a buyer’s monthly costs by less than $4 on an average loan, and it is untargeted, making it unlikely to be effective.

Tax Credit Offers Almost No Monthly Savings
Credit Is Unlikely to Lure New Buyers into the Housing Market
  No Tax Credit With Tax Credit Tax Credit
House Price $200,000 $200,000
Down Payment 3% 3% + $8,000
  $5,000 $13,000
Mortgage $195,000 $187,000 $8,000
Interest Rate 6% 6% 0%
Term (years) 30 30 15
Mortgage Payment $1,169.12 $1,121.16 $44.44
TC Recapture $ – $44.44
Monthly Cost $1,169.12 $1,165.60
Savings   $3.52  

The $8,000 tax credit would be offered to potential buyers regardless of whether they needed the credit to finance the purchase of a new home or not. As the math above details, the value of the credit is unlikely to draw someone with no intent to purchase into the housing market. Offering incentives to people to do what they already planned to do is not a good use of taxpayer funds by all accounts.

The $8,000 tax credit is not a tax credit in the traditional sense. It must be paid back over the next 15 tax years, with any unrecaptured credit due in the year of sale. It is therefore best thought of as a 15-year loan at zero interest. Assuming a buyer puts an additional $8,000 toward a down payment in anticipation of a tax credit the following year, the difference in monthly payment for a loan at 6 percent interest without the credit is $3.52. While the savings is sufficient for the homebuyer to have a latte at Starbucks on the taxpayer each month, we imagine this is hardly the stimulative effect Congress intends.

The credit also has no geographic targeting. Unlike the $3.9 billion for neighborhood stabilization, which would be targeted to areas of greatest need and directly drive demand for construction jobs, buyers could use the credit anywhere and may even be more likely to use it in healthy markets where, again, no incentive to purchase is needed.

We recognize that the political support for the appealing new homebuyer tax credit makes it difficult to argue for it to be abandoned in favor of targeted grants with demonstrable stimulative effects. But if the case can be made to find revenue to finance the tax credit, then it should also be a leadership priority to find a way to pay for the less costly and more effective neighborhood stabilization funds.

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