Senator Isakson on RE: We Need More Gas!

Senator John Isakson (R. Ga.) knows how to sell real estate. For twenty years he built up Northside Realty outside of Atlanta. His company is one of the largest independent RE brokerages in the country. With that much experience he knows full well that when you provide 95% LTV loans and a tax rebate that allows the buyer to put up net-net zero money down on a home purchase you can move real estate again. The Senator is pushing hard to extend the existing first time home buyer program. He wants to dramatically expand the scope (and cost) of the program as well. From the Senator’s web page:

“Specifically, my legislation would increase the maximum amount of the credit from $8,000 to $15,000 and expand the current tax credit so that it applies to any buyer of any home, not just first-time buyers. My legislation also would eliminate the income caps of $75,000 for an individual and $150,000 for a couple under the current tax credit so that there is no income limit for eligibility. Finally, the legislation would extend the tax credit for one year from date of enactment and would still allow home buyers to claim the credit on their 2009 tax return for purchases made in 2010.”

This proposal would double the size of the program and it would change it from ‘first time buyer’ to ‘anyone goes’. Bloomberg interviewed the Senator. From the article:

Sept. 16 (Bloomberg) -- An extension of the $8,000 U.S. home buyer tax credit is gaining support in the Senate as bill sponsor John Isakson said he is rallying lawmakers to continue a program that helped boost home sales by more than 1 million.

I hope that this statement is a misquote. Possibly an error by Bloomberg. But if this is a correct statement, then it is very significant. Some implications:

-The existing Tax Credit for home buyers is a product of the American Recovery and Reinvestment Act of 2/17/2009. The cost of this incentive was estimated to be $3 billion. If the Senator were correct that the number of home sales attributable to the program is 1mm, then the cost would already be in excess of $8 billion. That would imply that this program is already 250% over budget and we still have until Halloween before it ends.

-Recent data puts annual sales of exiting homes at +/-5mm and new homes at +/-500k. The rebate program has been in place for six months; approximately 3mm homes were sold during that period. The conclusion by the Senator is that one-third of all homes sold are the result of the subsidy and the cheap money from FHA. No wonder the Senator wants to keep this ball rolling. Without it sales would tumble. Not so good for the family business.

-As a RE pro Senator Isakson know that when you mix high LTV loans with a no money down borrower you get big defaults. The Senator also knows that the default rate is what is killing us. Yet he proposes to pour more gas on the problem. He also knows that when these loans do default the ultimate cost will be born by the taxpayers.

-Assume a more realistic scenario: 20% of the 7mm homes to be sold in the year following implementation of the Senators proposal are a result of the program. That would be a conservative assumption. This would put the cost of Senator Isakson’s bill at $21 billion. That does not include the credit losses that would surely come from this. Call it $30 billion. Whose money is this that the Senator is spending?

The worst of the economic crisis is behind us. Bernanke says so. We need to stop the economic interference. The Senator’s proposal will certainly stimulate home sales while it is in place. All that does is create more debt, more defaults and more bubbles.

Senator Isakson reports that he has eleven grandchildren. I am sure that he is a loving and proud grandfather. He needs to think of the consequences of his proposed legislation. He is robbing his grandchildren (and everyone else under twenty-five in America today) of their future.