Extending the Tax Credit

Help for a Sustainable Recovery
By Lawrence Yun, Chief Economist, NAR Research

While we listen to the animated discussions surrounding the health care debate, war strategies, flu vaccines and Nobel
Peace Prizes, the federal budget deficit continues to rise. There is certainly no delight in watching the budget deficit soar.
The $1.4 trillion deficit in the 2009 fiscal year to September is the highest ever in U.S. history - both in sheer dollar figures
as well as the highest since the Second World War if measured in relation to the overall economic pie. It's a huge burden to
future generations.

Why should we be concerned? Because continuing high budget deficits could easily cause interest

rates to rise much sooner - and possibly quite sharply. Yes, there will be arguments about what federal programs work and
which ones just bleed money. But Washington needs to come out with a credible plan to reduce the deficit over time.

Meanwhile, price correction - and over-correction - have wreaked havoc on the broader economy. Wall Street balance sheets
were bleeding heavily before the big help from the $700 billion TARP funding. Property owners felt it, too: foreclosures
spiked, strategic defaults rose among financially capable but underwater homeowners, and appraisals became messier.
Most importantly in terms of economic impact, the bulk of American families have experienced a major hit to their wealth
accumulation -- by more than $4 trillion in the past three years. The economy will have a difficult time gaining firm footing
without government life support if home values continue to fall.

One area where federal taxpayer dollars have been effectively utilized is that first-time homebuyer tax credit. The key to any
future sustainable economic recovery lies in home values stabilizing or, better yet, a return to a historical home price
appreciation rate of 3 to 5 percent each year. The bubble prices crash landed, but all the excesses have already been
removed. In fact, one could legitimately argue that home values have overshot downward. Price-to-income ratio is now below
the historical average. The monthly mortgage payment for a middle income person buying a middle priced home is well below
its historical norm.

A review of the latest data strongly suggests that the homebuyer tax credit has had its intended impact of significantly
stimulating home sales. From about 4.5 million annualized home sales pace in the few months prior to the stimulus, sales
have jumped to 5.1 million in recent months. That is a change of 600,000 additional existing-home sales. New home sales
have risen from the mid 300,000 to low 400,000 range over the similar period. The rise in sales has been concentrated in the
lower-priced home segment largely because first-time buyers are looking to stay, rightly, well within their budget.

Housing inventories, while still higher than desired levels, have been trimmed. The latest 8-month supply of existing-home
inventory is much better than the double-digit figures of last year. Home values have likewise moved in an "improving"
direction. Broadly speaking, they are down from one year ago, but the declines have been less steep in recent months
compared to the pre-stimulus times. The median existing-home price as of August was down 12.5 percent compared to a
nearly 20 percent decline early in the year. In short, sales have risen and home prices are on the verge of stabilizing.

But the housing stimulus package is set to expire. A settlement, and not the contract signing to buy, must occur by the end
of November. Some first-time buyers who are signing contracts to buy in October just may make the deadline. It would be
pity if the housing market which is just on the cusp of a self-sustaining recovery rolls downhill again. That could happen if
potential buyers step back and inventory returns to an upward climb. Falling home values - independent of whether it is
over-correcting or not - will bring back all the associated collateral damage.

A much happier scenario would be that the buying momentum continues for few additional quarters so that inventory falls
back down to the normal 5 to 7 months, a level consistent with home value stabilization. Once that is accomplished, the
consumer "fear factor" of waiting and waiting for a lower price later will no longer be part of the home buying decision. We will
have reached a point of housing market self-sustainability. Consumer confidence will be lifted. The wealth impact of
consumers opening up wallets for general consumer goods will steadily turn positive. Thus, the broader economy also gets
set for a sustainable recovery without needing further stimulus dollars.

For that happy scenario to play out, a time extension on the home buyer tax credit is critically needed. At a cost of about
$10 billion (if extended through the middle of next year), the housing market will likely have recovered nicely with the broader
economy on track for a solid robust expansion. That $10 billion price tag is rather modest compared to the $700 billion in
TARP funding and $800 billion of the broader economic stimulus package that was passed early in the year (with debate still
raging over the effectiveness of that broad spending bill). Moreover, the cost of $10 billion is a static measure that does not
take into account job creations and increased tax revenue from rising economic activity. Actually, if we take into
consideration all of the economic dynamic responses, the homebuyer tax credit can be argued as a net positive revenue
generator for the federal government.

There is nothing like economic growth to dent budget deficits. If the economy was already at full capacity, the housing
stimulus would simply be moving dollars from one sector of the economy to another. But as is fully visible out in the streets,
we are nowhere near full capacity. Factory capacity utilization was 69.6 percent in August, compared to an 80 percent rate
that should be the case in normal economic times. On the job market front, the country is facing a double-digit
unemployment rate rather than the healthy 5 or 6 percent unemployment rate. Therefore, there is a plenty of room for growth
for a win-win situation for the housing market and other sectors of the economy.

Despite these vast potential benefits to the economy from extending the homebuyer tax credit, valid questions should
nonetheless be asked. Is there any pent-up demand remaining? Will the tax credit just go to the people who would have
bought a home anyway and thereby will simply pocket the $8,000 check? Well, the following table shows a compelling case
for tapping the financially healthy renter population.

In 2000, before the housing market boom, there were 11.5 million renter households who had the necessary income to buy a
median priced home at prevailing market conditions. Today, the pool of renters who can buy a median priced home is over
16 million. Just nudging even a small share - say 5 percent - of these financially healthy renters into buying via a tax credit
check will mean 800,000 additional home sales. That number is sufficiently meaningful to get the inventory down to the level
of home value stabilization. The housing market will then be on the path to a self-sustaining recovery.

After what we have been through this decade, it would be quite nice to observe a return of a "boring" housing market with
annual price growth of a steady and normal 3 to 5 percent - without any of the fits, frenzy, and panic. A faster and firmer
recovery can happen if the tax credit is opened up to more buyers by making it apply to any buyers - just just first-timers -
and by raising the income limit for qualification. It would also contribute to healthy economic activity - a sustained recovery -
and thus help to put a dent in the deficit. In short - it's a win/win. NAR is working hard to get that homebuyer tax credit
extended. You can help - by calling, writing or e-mailing your Congressional representatives. It's good for home buyers, it's
good for REALTORS®, and it's good for the U.S. economy.

For the latest economic forecast insights and analysis, visit www.realtor.org/research/research_commentary