$25 Billion Helicopter Drop for Homebuilders...
........................................... "The Homebuilder Bailout Act"
Wasteful $29 Billion Tax Cut Won't Help Housing:
Commentary by John M. Berry
bloomberg.com
April 7 (Bloomberg) -- Suppose you're trying to sell your house when a similar home down the street has a sign in its yard proclaiming, ``Foreclosure. Priced to Sell.'
You're probably already upset because the foreclosure likely has driven down the value of homes in the neighborhood. Then you learn that a law has just been passed giving a $7,000 income tax credit to anyone who buys a foreclosed property, further undercutting your asking price.
That misguided tax provision isn't on the books yet, though it might be later this year.
It's part of a deal that includes $29 billion in tax cuts through 2010 that are intended to give the battered housing market a boost. U.S. Senate leaders agreed to it on April 2.
Another part of the bipartisan deal would be a new $1,000 standard deduction for people filing joint income-tax returns that pay state and local property taxes and can't deduct them because they don't itemize. Individual filers would get a $500 deduction.
However, the revenue loss due to the foreclosure purchase credit and the new standard deduction would be chicken feed compared with a third provision. More than $25 billion would be handed out to homebuilders over a three-year period in the form of rebates of income taxes paid during the height of the housing boom.
The proposal would let homebuilders carry net-operating losses incurred in 2008 and 2009 for four years instead of just two as the tax code now allows.
``These tax provisions will keep property values up, keep folks in their homes, and keep businesses afloat, and those are all keys to handling the housing crisis,' Senate Finance Committee Chairman Max Baucus, a Montana Democrat, said in a statement.
$7,000 Credit
No, they're not keys to handling the housing crisis.
At best, they would be a waste of taxpayer money. At worst, they might delay some of the adjustments that have to occur before the housing market can stabilize.
The $7,000 credit, which would be paid over two years, is as likely to depress values as to prop them up.
Why provide a credit to a buyer that's also going to help a lender sell a property when a hard-pressed homeowner in the same neighborhood is also trying to sell his property, possibly to avoid a foreclosure? Might that other owner not feel pressure to lower his asking price in the face of an effective reduction in the price of the foreclosed property?
As for a standard deduction for property taxes, most of the benefit would go to the majority of homeowners who are in no danger of losing their homes. And the amount of money involved is far too small to make much difference if a foreclosure is looming.
Perverse Impact?
Most couples that don't itemize have relatively low incomes and are taxed at a marginal rate of 10 percent or 15 percent. So a $1,000 standard deduction for property taxes would reduce their income taxes by only $100 or $150 a year. For single taxpayers, the benefit would be just $125 even for those in the 25 percent bracket.
Like the credit for someone buying a foreclosed property, the income-tax break for homebuilders could have a perverse impact and actually extend rather than shorten the current crisis.
The problem for homebuilders is that during the boom they geared up to construct more than 2 million new housing units a year. That included stockpiling land, increasing their workforces and constructing many houses on speculation.
Today, only about half that many homes are being built and sales have plunged. If anything, allowing losses to be carried back an extra two years could work to slow down the needed industry shakeout.
Wrong Thing
As a Finance Committee statement said on April 2, ``Homebuilders and other housing sector businesses particularly need cash to prevent layoffs, to avoid selling land and houses at distressed prices, and simply to shore up their lagging bottom lines.'
Avoiding the sale of land and the inventory of unsold new homes is exactly the wrong thing to encourage. Reducing the overhang of new homes is the real key to establishing a bottom for the industry. And until that is done, shoring up homebuilder bottom lines would do precious little to prevent layoffs.
There is no reason to think there won't be plenty of construction capacity available when it's needed again. Even large homebuilders usually expand by hiring additional subcontractors, and there won't be any shortage of construction labor available.
There are other provisions of the legislation that might help more than they hurt, including an increase in the size of a mortgage that the Federal Housing Administration can insure in some areas to $550,000 from $417,000. Another $100 million could be provided to pay for counseling services for homeowners having difficulty paying their mortgages.
Other expensive provisions aren't likely to provide any aid to the housing market until after the wave of foreclosures has passed.
This legislation known as the ``Foreclosure Prevention Act of 2008' should be called the ``Homebuilder Bailout Act.'
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Mo deficits = mo weaker dollar.
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