Tax Credit a bad thing??

In an effort to stimulate the economy the government is allowing a tax credit of $8000 to first time homebuyers as long as they have a fully executed contract in place by April 30, 2010 and close on the property by June 30, 2010. This sounds great on the surface but here’s why this tax credit was a bad idea for the economy and the housing market:

Applying “credits” like this artificially inflate the real estate marketplace. In a land of people trying to buy properties through FHA loans (which only require 3.5% down) and on top of that receiving an $8,000 tax credit we are not only limiting the amount of “skin in the game” that home buyers are responsible for but we are handing out bonuses to people to buy properties in this market.

Wasn’t part of the reason of this entire real estate recession due to people putting down limited cash to buy properties? I am 100% sure that it was! Now the FHA deals are only requiring 3.5% down? Sounds like a recipe for pending disaster to me…

On top of that, this tax credit bonus is “forcing” people to buy properties on a tight timetable in order to qualify for the credit. This in turn is driving pricing up again to artificial levels as people scramble to get in on properties and get involved in bidding wars in order to have a property under contract in time.

It kind of reminds me of the free alcohol comps in Vegas. How many people will spend another $50 at the table while waiting for the waitress to bring back their comped drink because they don’t want to miss out on a “free” drink?

The same thing can happen with these properties — people don’t want to miss out on the tax credit because it’s “free money” but yet they will drive up the price of their property 10k-15k in order to get it in time. That just doesn’t make economical sense to me.

So now that these properties have been artificially inflated in value what happens when all these tax credits stop? The housing slump will continue and even more people will be in properties with over-inflated values and we’ll see this real estate recession cycle just continue on its way.

Don’t get me wrong, I’m glad that the tax credit exists and so are my buyers. However it needs to be used with caution and not as the main reason to run right out and buy a house! Make a decision on a property because of location, functionality, and how it meets the needs of your family, not because you can get 8k off the price.

Used responsibly I believe the tax credit can be a great thing for many people but in the wrong hands it may wreak havoc on an already unstable marketplace.

Related posts:

1. Extend the Tax Credit!!!
2. Tax Credit is now officially extended!!
3. FHA Guidelines — Good or Bad?
4. 10 Credit Repair Tips
5. Tax Credit Extension Facts