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The Acid-Laced Band Aid: Extending & Expanding the Gimmicky $8,000 Homebuyer Credit
In what should be the bottom news story of the day, Congress has decided to extend the $8,000 homebuyer credit. I called this already, but it did not require the skills of Nostradamus.
The extension would cover homes under contract by April 30, 2010. It would also not require first-time buyers. Anyone who has owned a home for at least five years could get a $6,500 credit on a new residence. Income limits for eligibility would also be raised, making many more people qualify. Rich people buying another home get an $8,000 gift, even if they don’t need it. On the flip side, poor people who overpaid in the last few years for a home can now trade up under the program — combined with an FHA loan. This will allow them to buy a new home for next to no money down, and strategically default on the old one.
I may be radical in my belief that Uncle Sam should refinance all residential properties down to 1-2%, for those borrowers earning verifiable W-2 income, and willing to sign with a personal guarantee. However, extending this $8,000 provision, in the absence of requiring a minimum 20-25% downpayment or verifiable W-2 income, is a recipe for further disaster. More people will strategically default. The government is making it easier to switch out your old, underwater home, for a new, seemingly market-priced home. But if these old houses come to market, along with seven million units that still have not, they will further drive down market prices. This will push more home values underwater, increase foreclosure and vacancy rates, further drive down rents, and compress apartment building valuations. This, in turn, will cause further commercial mortgage defaults in the multifamily asset class.
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Check out what others are saying about this post...[...] Perhaps the $55 million tax credit might go to a loftier purpose, like homebuyer credits for 6,875 strategic defaulters. [...]