Given that we’ve seen reports that the administration might be consideringproposing a new Home Buyer Tax Credit, I wanted to share some thoughts about how Congress could draft legislation that might create a more effective and simpler program.
Most of these suggestions come from my experience as a broker dealing with the tax credit over the past three years, and particularly my experience breaking down and analyzing the credit on this blog and for the homebuyertaxcredit.comsite.
First, keep the dual-deadline feature, with one deadline for contracts and another deadline for closings. Having one deadline for contracts and a later deadline for closings effectively spurs home buyers right up to the contract deadline, and then gives everyone in the industry time to work through the pipeline of contracts go get everyone closed in time. The original versions of the tax credit only had one deadline, interpreted as a closing deadline, but the problem was that the credit lost its incentive impact in the last month or so of availability, since very few people can get into contract and close in a month. Congress introduced the dual-date deadline feature in the November 2009 extension of the credit, and it kept the engine running through the April 3oth contract deadline.
Second, give at least 120 days between the contract and closing deadline. The November 2009 extension of the credit required contracts by April 30th and closings by June 30th, only a 60-day window. What we learned was that buyers procrastinate, with lots of buyers getting into contract just under the deadline, creating a massive pipeline of buyers that could not possibly close within 60 days. The welcome extension of the closing deadline through September eased that stress, so Congress would be foolish to create a new tax credit with a narrow window between contract and closing.
Third, eliminate the income limitations, but keep the purchase price restriction, if your intent is to limit the tax credit to the middle class. Congress doesn’t want to be perceived as giving tax credits to people with high incomes, but the income limitations are confusing and probably unfair to people who end up just missing them. Anyone who makes much more than the income limitations is probably going to be buying a home that is more expensive than the $800,000 purchase price limitation, anyway, so you don’t need the income limitations to limit applicability to the wealthy. (Even better, tie the purchase price limitation to regional home prices, since an $800,000 home in Westchester is basically an average-priced home, while a $800,000 home in rural areas is a mansion.)
Fourth, eliminate the ownership history limitations. The tax credit started as a “first-time” home buyer tax credit, then in November 2009 morphed into an extraordinarily complex “first-time home buyer and long-time homeowner” tax credit. Just eliminate the ownership history requirements. If you want to avoid applying the tax credit to investors, then just keep the residency requirement. But the “you have to live in the same home for five consecutive years out of the last eight, or not live in your current residence for the past three years” is confusing and unnecessary. Give the credit to anyone who buys a home, so long as they’re buying it to live in it. Keep it simple. That might put me out of a job, insofar as I won’t need to write up 30,000 words explaining the intricacies, but this job has not exactly paid the light bill so I won’t miss it.
Fifth, phase the credit out gradually, to create a “Methadone effect” of slow withdrawal for buyers claiming the credit. One of the problems with the past versions of the tax credit was the hard stop: if you were in contract as of April 30th, you could get the credit, but if you got into contract on May 1, you got nothing. That tended to drive a of buyer behavior, with people rushing to meet the deadline, then exhaling and dropping out of the market. Instead, create a tax credit that phases out over time in, say, three month increments: $8,000 if you are in contract by December 31, $6,000 if you are in contract by March 31, $4,000 if you are in contract by June 31, and so on. Ultimately, you have to turn it off, but if it phased out you might get a “methadone” effect in which home buyers would not be as addicted to it as they seem to be as soon as the credit expires.
