When Schumer says, ”We have to extend the housing tax credit” Cornyn says, “Chuck and I agree”.
Cornyn
went on to make a plug for Senator Isakson’s (R.GA.) bill. This would
expand the $8,000 tax credit to $15,000. I t would also make it
available to all comers. The existing bill is only for first time
buyers.
While Cornyn is talking, Chuck is shaking his head, Yes, yes, yes.
The clip is here. The discussion on the tax credit is at -9.55.
Read
this to mean that it is certain that the existing subsidy will be
extended. In my view these two making nice on TV means that a form of
the Isakson bill is what we are going to get. This is a very
significant development.
For the sake of discussion assume we do
get a $15k credit. Assume also that the FHA makes available 90%
mortgages at low rates (they are currently doing 96.5% LTV, so this is
a conservative assumption). The question is how many will take
advantage of this and what might be the consequences.
On September 17th the IRS came out with this headline:
First-Time Homebuyer Credit Provides Tax Benefits to 1.4 Million Families to Date, More Claims Expected
There
is a backlog on these deals today. It is reasonable to assume that the
$8,000 credit could result in 2mm homes being sold in just nine months.
Based on this what is an estimate for the number of homes sold with the
$15k incentive that is open to all? I think 4 million is a good number.
Let’s use 3 million to be conservative.
The average price of a home is $200,000 (also conservative). Using all of these assumptions you get some very big results.
-This translates into a total sale value of $600 billion.
-The direct cost to the government would be $45 billion.
-The total equity required by the private sector net of the subsidy would be $15 billion. The equivalent of only 2.5% down.
-FHA would guaranty an addition $540 billion in new mortgages.
Based on the assumptions the following positives may occur:
-This
would be a back door bailout of the GSE’s. It would give them an
opportunity to off load some of their REO. It would also reduce costs
of short sales that will come in the next year. This only lessens the
loss however.
-The FHA would have an explosion of new activity.
This premium income would dramatically increase their cash cushion. It
would temporarily avoid a bailout of FHA. It would insure that the
ultimate bailout costs will be much higher.
-The economic
activity related to the sale of 3mm homes will contribute to GDP. For
example; the RE commissions will be $30 billion, the mortgage brokers
will get $6 billion, The lawyers will collect another $6b in closing
costs. This is how America makes money. This class of beneficiaries
just takes commission as part of the creation of debt. There is zero
residual value to this. It is just pumping up current consumption.
-You
have to assume it would benefit the big, publicly traded, homebuilders.
How much clout does this group have? Plenty. Senator Isakson’s family
owns one of the largest private RE brokerages in the country.
-This
could be beneficial for holders of busted MBS. Additional demand for
the underlying collateral will create better exit opportunities. While
this does not make any of the old crap money good, some smart folks are
going to make some dough off of this. It might even benefit the
zombies. You can be sure the GS’s of Wall Street will make a buck. More
clout.
There are some negatives:
-There
is an on budget cost of $45 billion. A very big number. There will be
some who appose it. But I think it will pass. Congress is looking for a
new stimulus package. This is going to be a part of that. The ‘Bear
Hug’ on TV today convinced me.
-In my example 97.5% or about
$585 billion will be debt issuance by either Treasury or Ginnie Mae.
This would increase the 2010 funding requirement by about 30%. No one
cares about this issue. Bernanke still has $500b of Agency buy back
power. If they want to do more, there is nothing stopping them.
-This
program will have the same effect as the Clunkers program. While the
window is open that stimulus is powerful. The existing housing tax
credit has been very successful. It is reasonable to assume that a
larger, broader program would also bring results.
But as with
Clunkers, when the music stops demand stops as well. Given the
magnitude of this potential bill the impacts would be very substantial
when the program is ended. There will be a great sucking noise in the
months that follow the end of this and the other ‘fixes’. We will not
QE ourselves out of that one. The sucking noise will be heard around
the world.
My guess is that the Isakson bill will come out of
the Senate. Congressman Barney Frank (D.NY) has a big say in this. He
would do anything that would help the Agencies. He enabled them. So
this will come down to the WH.
-Geither and Goolsbee will say yes.
-Summers will carefully describe the pros and cons. He will lean toward a more modest proposal.
-Volker will say no to this.
-Bernanke will end up supporting it. (He doesn’t have a say)
-The political advisors will say, “pedal to the metal”.
Someone will say:
“Do
a $12,000 cap deal. Sell the lower number as a measure of your fiscal
conservatism. Low-ball the estimate of homes sold but leave the door
open until 12/1/2010. The old $8k tax credit will be double over
budget. Same with this credit. Worry about that later. This plugs some
deep holes. It will look like progress is being made. The Dems will
carry the mid terms in both Houses and you will have two years of grace.
This debt will be off of Treasuries balance sheet so no one will notice. Anyway, no one cares about that."
It’s a pretty compelling case. This is going to pass.
You're all incredibly annoying with your politics, money, slavery......blah blah blah. This is the kind of negativity that brings down the morale of this country. How about you stop nagging and being selfish and switch your perspective for a sec! This is helping children grow up in better homes and possibly get a better education which would benefit our children and grandchildren in the longrun considering they are our future leaders, thats life so go fishing or golfing and suck it up and deal with it or skedaddle on out the country! You sound like a bunch of.......
Of all the things that may result from this the one thing that will not happen is some benefits to our children. This type of thing only buys some time. It will not work. It will only result in a bigger fall at some point in the future. When I write these things and worry about what is going I always think of the countries children. We are robbing them blind. It is grossly unfair.
im a realtor for remax in south of chicago. everyone hates me in my office cuz i am totally against this and i let my feeling known. fricken idiots think this is going to help in the long run. its like talking to a bunch of junkies
I agree with this piece. It is all but inevitable that the current $8000 credit will be extended beyond Nov. 30 or replaced with something bigger. The administration and Congress know that housing transactions and prices will drop if the current program is allowed to expire. I would not be surprised if Congress also raises the FHA limits so Fannie and Freddie and Ginnie Mae can do higher priced mortgages as the CEO of Wells Fargo recently begged for. You have to figure the Congressional delegations in high priced housing states like CA, NY and MA will be pushing for it. Why stop at reflating only the low end of the housing bubble?
Bruce, you may find a nugget here that may interest you. From Chris Whalen at the IRA.
http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=385
Great read. Thanks
[Senator Isakson’s family owns one of the largest private RE brokerages in the country.]
In other words, he's scum. Doesn't have the decency to recuse himself from related issues. Why am I not surprised.
Both our nations poltiburo parties are melded into one theiving agency. I see a new party taking hold next election . History repeats . Or maybe we'll all be microwaved to death if we don't support the current corruption . I doubt I will see a change in my lifetime . Maybe my grandkids can bring it about . The entire system is going "rogue" . To quote Elvis Costello , "I used to be disgusted , now I'm just amused ". You can almost predict the asininitties that come from the mouths of these totally corrupt men.
"There is zero residual value to this. It is just pumping up current consumption."
Really? That's a funny comment on a blog run and frequented by finance geeks, none of whom add any value to the system.
This could mean people will pull their money out of the stock market to buy a house. They will want to do so before higher capital gains taxes kick in.
Disconnect: If housing prices, and the economy-at-large, are stated to be stabilizing and at the point of recovery, why would there be a need to double-down on a housing credit? Why do these two Senators appear to be responding out of fear?
Um by giving a credit towards the house they are actually lowering the price.
No. A $15,000 credit will absolutely not lower the price of a house. For the exact playout of this scenario, look at Bing's cashback system and the effect on ebay once the cashback rate goes from 10% to 20%. The prices on the items on ebay are immediately adjusted upwards to account for the knowledge that the buyer is recouping a larger % of the purchase. Same thing will happen here. (or, the asking price will not decrease as much as it would have outside of stimulus).
And on a side note, my gf took advantage of the first time home buyer credit... and she hasn't refinanced the loan... I'm thinking it's take the credit, sell the house after December 31, get floated for 1 year on the 8k, and then offset the 15k with repayment of the 8k in year 2. Not that interest on $8k is that much, but it might provide some investment opportunity (ammo!)... and it's just standard procedure when dealing with TVM.
But, the difference between cash for clunkers and home buyer's credit is that the "clunkers" were at least supposed to be demolished in some fashion. All we're going to get with the home buyer credit is a swap meet. I do your laundry for 15k and you do mine for 15k and we're better off! (or, you give me a cut of the $15k and I'll happily get the hell out of dodge and start renting, renewing my lease every year at a lower and lower rent as the value of the underlying asset continues to depreciate).
Eventually, we'll start to look at houses as a consumption rather than an "investment." If you're a real estate professional with legitimate experience and know how, you might be making an investment... otherwise, you're just the mark.
This is a gift to the Real Estate industry. The $15k will be "harvested" by not letting prices fall to an actual equilibrium point.
A lot of things contributed to the 08 crash, but cheif among them were the record amount of crap debt instruments issued 05-07. Things started coming to a head as the 05-6 vintages started showing heavy losses by late 08.
05-07 the problem was loose lending standards leading to defaults. Now the problem will be crap economy and economic hardship leading to defaults. But the process will be the same. I'm sure all 09-10 vintages will have as many if not more defaults.
I know I'm playing capitan obvious here, but thats kinda the point. Most folk reading these things are knowledgable about these things to some degree, and its freaking scary. The longer these programs continue, folk who never knew or cared at all about finance start to see the ponzi for what it is. Monetizing, endless defecits, legalized accounting fraud, market manipulation...what the funk are we doing?
the message must be clear but America is half communist now so max pain must ensue since they will run out of your money and steal the rest.
By the 4th year of this prez term, houses, cars and shopping vouchers would be given away free, fully-paid by congress. If QE doesn't boost GDP enough to crate inflation, then rain it doen on them. Then all americans would be happy and benefit with no one envious. Too bad to our foreign debt holders, n one asked them to buy our electronic entries and stupid enough to pay with real goods. Blame themselves for not studying history of defaults.
The smart buyers will wait until the donkeys in Congress finally run out of other people's money and housing demand collapses. Personally I'd want at least $50,000 to sell myself into debt slavery.
Yup,if this passes I am a seller, not a buyer. Sooner or later they run out of other people's money to spend, that is when you buy:
no subsidies + high interest rates
that is what you want.
"It is reasonable to assume that the $8,000 credit could result in 2mm homes being sold in just nine months."
With a total population of just over 300 million, in a landscape that seems overrun with apartment complexes, trailer parks, nursing homes, ranches, farms and homeless shelters, that there could be 106 million "occupied single family residences" (or whatever the number is) seems impossible to comprehend.
A 1st time homeowner in the definition of the current subsidy is someone who had not previously owned a home in the last 3 years. That there were 2 million (couples? families? 4 -6 million individuals) sitting on the sidelines, ostensibly renting in some fashion but with enough income and a high enough credit rating to qualify is incredible. That this will not have a backlash effect on CMBS where only deadbeats are left as renters is curious to consider.
"Based on this what is an estimate for the number of homes sold with the $15k incentive that is open to all?"
This, after how many (?) of the sufficiently credit eligible homeowners have just renegotiated their loans!?!?!
Do you walk away from the $3 grand you spent for that and pay the 6% commission on a $200k home to move for $12k?
3 million?!?! Amazing. Stories of a million bankruptcies a year, a million foreclosures, 3 million in prison, 2 million who just took the $8k, it boggles the mind.
As with cash 4 clunkers I think this is all a ruse.
Dealers, Investors and the like scam the system with phony paperwork presented to former Acorn employees now hired as loan processors and MSM sleeping in the comfort of Ruperts' warm embrace, why should I fight it? I'll be first in line.
http://wiki.answers.com/Q/How_many_single_family_homes_are_there_in_the_...
NINJA THE SEQUAL COMING TO A TOWN NEAR YOU...
No Income, No Job and Alien...
This is actually a pretty good idea. It'll artificially increase sales around the country, which is good because now current homeowners can 'move up' the chain. Artificial isn't too bad in this case since the residential real estate market has been artificially propped up for the past 40 years...
Smart current homeowners will unload their albatross' and right size, not move up. Foot > can > road - only a person who believes unicorns convert hay to skittles is in favor of more of that activity.
Absolutely, if this passes I will wait for the bump to unload my house which still has some equity, and start renting from some poor sucker who is way underwater and has decided to become a landlord.
As someone stated above, if this passes 2010 may be the last chance for years to unload a house.
40 years? why not state 300 for better shock value.
Who are lemmings?
A plan purely to benefit government workers. They are the only ones with steady jobs who can guaranty that they can pay down a 30 year mortgage. No one in private industry has any hope of steady work for 30 years.
Great, because all the government employee unions will plow back large amounts of money back in the campaign funds of the enablers.
I think in the deliberations on whether this plan should be pursued or not, the last question asked if it is asked at all is can a person actually pay off the mortgage. 2.5% downpayments are precisely to ensure that the actual ability to pay off the loan isn't a factor in the loan being written.
It is this kind of sh*t that makes me want to leave this country.
Perhaps if, instead of invoking easy money from the future in order to inflate current pricing, housing prices were allowed to deflate, affordability might be realized without having to incur an ever larger debt burden.
I sure hope the brain trust staffers are working on wage inflation programs as well.
All those millions who are unemployed, or the other millions who are marginally employed... are going to just LOVE this plan. :(
Political Pornography at its best!!!! Do they really think we believe that they care about us?
.....and the impact on the USD???
I don't think sinking deeper in deficits to kick the can further down the road plays big with our foreign debtors.
If you need to sell your home, 2010 looks like your only chance. Don't be a slave to a depreciating asset.
Infuriating. To hell with all of them - if there's no difference between the Repubs and Schumer, why do they even exist. Cornyn's a moron.
when their job is done, they will be lined up against the wall and shot because they are no longer needed....
http://www.youtube.com/watch?v=zeMZGGQ0ERk
retroactive? - if it is it sort burns those who have bought with or without the earlier program but I agree it will happen, it's only $50B
subprime version 2.0 again. no downpayments, i'm sure debt/income ratio "barriers" will continue to be overlooked, blah, blah, blah. this is not going to help the mantra that we need to lend responsibly.
will be interesting to see how the opposition handles this one
For a tax credit to work, one needs income and taxes.
Doubling down after April 2009 tax revenues were down
-34%.
Low down high LTV loans default, period.
Politicians rearranging the deckchairs on the Titanic
may not be laughing and nodding by 2010
elections...
JubileeProsperity.com
First time - tragedy. Second time - farce.
Eventually they're going to run out of other peoples' money - but we're clearly not there yet.