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A Whole New World – Why the New and Expanded Tax Credit May Save the US Economy!

A Whole New World – Why the New and Expanded Tax Credit May Save the US Economy!

This past Friday, President Obama signed into law H.R. 3548.  This bill, at it’s heart a bill to extend unemployment worldbenefits {which, by the way, is being completely overlooked as the critical step it was to help the unemployed workers in this country, but that’s a topic for another day (see, I’m overlooking it too!)} contained a roundly supported amendment to Extend and Expand the First Time Home Buyer Tax Credit that was set to expire this month.  Unless you were hiding under a rock, by now you’ve no doubt heard countless talking heads telling you that this bill will either (A) Save the US Economy or (B) Lead the US Economy into a head on Collision with the ever growing Mountain of National Debt.

Well, if you were looking for someone to support Choice (B), you should probably look elsewhere.  But if you were looking for someone to explain just why this bill is critical to the recovery of the nation’s housing market and just may save our entire economy, then keep on reading!

In expanding and extending the tax credit, our government has helped to open up a Whole New World.  While the extension of the $8,000 First Time Buyer Tax Credit is wonderful, and I was (and still am) a hearty proponent of  making life easier for First Time Buyers, the addition of the $6,500 Tax Credit for Repeat/Move Up Buyers is the thing I am most excited about!

Let’s hit the highlights of how Repeat Buyer Credit benefits the housing market, then we’ll discuss this deeper:

  1. Repeat Home Buyers who are buying a  principal residence and have owned their current principal residence for at least 5 of the last 8 years, are eligible for a credit of up to $6,500.
  2. Homes must be under contract before May 1, 2010 and must settle before July 30, 2010.
  3. The Maximum allowable purchase price for qualifying buyers is $800,000.
  4. The qualifying income limits have been raised to $125,000 for single buyers and $225,000 for married buyers.

So why the Whole New World?  Why is this so important to our economy?  Take a look at #4.  By opening up the credit to buyers making annual salaries that high, you pretty much covered anyone who may be incentivized to buy.  Folks making more than that probably aren’t factoring in a tax credit into the timing of their move.  Same thought goes for #3, if you are buying a home over $800,000 (which far exceeds the median sales price in even the highest priced markets), you probably aren’t being motivated by a tax credit.  But wait, so far I still haven’t given you any reason as to why increased home buying helps our economy.

For that, look no farther than #2 and #1!  As the winter of 2009/2010 progresses, you are going to see some increasingly dismal economic numbers.  Holiday sales will be down, unemployment will tick up a few tenths of a percent and for many it will be a long, cold winter.  By extending the tax credit until the end of May, it encourages buyers who would look at those things and decide to wait “till things get better” to stay in the market and buy NOW.  

As far as owners who have owned a home for 5 of the last 8 years, the benefit to that is clear if you look at the recent history of the housing market cycles.  By definition, these homeowners bought their homes prior to 2004 (before the height of the the boom in most markets) and the assumption is that these homeowners have equity in their homes (no short sales!) and are theoretically financially stable, as longer term homeownership has in the past has been an indicator of economic stability.  So in short, the theory from Uncle Sam is that these people have good credit and money, the perfect people to buy houses!  Let’s not forget the fact that they don’t have to currently own a home, they could have sold a home last year and been renting, as long as the home was owned for 5 out of the last 8 years, they qualify.

While I don”t believe it really is that simple, I’ll admit there is more needed to improve the housing market (stable employment and available financing, to name 2), I do believe this tax credit will benefit the economy.  It will motivate many to buy who otherwise would not, renters and current owners.  This increase in activity will move up the price chain, as these repeat buyers will typically buy in a higher priced home (although they don’t have to, they could downsize) which will help clear out the high levels of inventory in some areas.  Clearing out the higher priced inventory will help to stabilize falling home prices in certain metro areas around the country.  As these repeat sellers put their homes on the market, more choices will be available in the lower price ranges which will encourage more buyers to wade into the pool, making more sales happen. money

Beyond that, let’s think of the timing.  This tax credit becomes available AFTER the purchase, AFTER the buyers file their 2009 tax returns.  So, beginning near the end of the 1st quarter of 2010, homeowners receiving the tax credit will have thousands of dollars to spend.  Based on how Americans have reacted in the past, they will spend it.  If they don’t spend it, maybe they’ll use it to pay down debt, which is also good, as lower debt payments will free up more of their monthly income for ….. that’s right, you guessed it, more spending!

Like it or not, that’s America.  People make money, people spend money, that is what makes our capitalistic world go ’round.  From home improvements, to furniture and electronics purchases, to construction and financing, to the trucking and shipping industries that move the goods and industries/retailers that employ people all the way up and down the supply chain, sales in the US Housing Market drive the US Economy.  Brisk activity in the Housing Market isn’t only critical to the paychecks of people like me, but to paychecks of the people all across the country.  That is why this credit is so important to our economy.

I’d like you to be part of the conversation, so if you like what you read here please comment, forward The Lancaster Connection.com to your friends, subscribe and as always, if you have questions, need real estate advice or want to buy or sell a home, you can call or text me at 717-371-0557, email me at Jason@JasonsHomes.com or contact me at the office at 717-490-8999!

Your Friend in Real Estate,

Jason Burkholder

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Jason Burkholder