How the First Time Home Buyer Credit Can Create Economic Growth

By A.B. (Staff Writer), on November 8, 2009

Last week, when the President signs the expanded aid package, my husband and I (and many others) breathe a collective sigh of relief. The expanded aid package includes a seven month extension of the First Time Home Buyer Credit. While many people do not support the extension, I am grateful for it. Granted, my position is a bit selfish; my husband and I decided not to risk overextending our finances to close on a house before November 30th. In doing so, we realized we were giving up a great opportunity with the current buyer’s trifecta: ridiculously low interest rates, depressed prices, and free money for buyers. Our goal is to buy a house next year, and a five month extension would put us right on track.

Photo by woodleywonderworks via Flickr

Benefits of First Time Home Buyer Credit

However, as a home buyer, I am not the only one that benefits from the credit extension. The public can benefit through several ways:

The Credit Increases Consumer Spending

While some programs do allow buyers to borrow against the credit for a down payment, these are not standard or prolific by any means. So even if the $8000 encourages real estate sales, the money itself does not go into the real estate market. Where does it go? It goes to Sears for the new washer and dryer. It goes to Lowe’s and Home Depot for those DIY repairs. It goes to subcontractors for the repairs that are DI-somebody else. It goes to Best Buy for that new flat screen TV, and if there’s money left over for a nice dinner out.

The Credit Can Encourage the Potential Purchase of Cosmetic Fixers

The house my husband and I were looking at was a cosmetic fixer. It needed new carpet in a couple of rooms, new exterior paint, and for someone to mow the lawn because banks don’t do that for foreclosures. Without the First Time Home Buyer Credit we would have to look at move-in ready homes, while the cottage we really liked continued to be an eyesore in the neighborhood, bringing property values down along with it.

The Credit May Create New Buyers

My aunt and uncle were quite content to rent an apartment until the end of their days, until the Credit was available. When I asked my aunt which she preferred, buying or renting, she said, “I still don’t like the responsibility of homeownership; it scares me. But with interest rates as low as they are, and the cushion the credit gave us, it was the smart decision to make.” If it weren’t for the credit, they wouldn’t have bought, plain and simple. In that single case, an argument can be made that this credit isn’t just pushing buyers to make an early decision, but actually creating them.

The Credit Creates a Sense of Buying Urgency.

Many first time home buyers were literally sprinting to the November 30th deadline. The Oregonian recently featured Boye Oshin, a local first-time home buyer who was stuck in a backlog glut of people trying to close “in time.” When my husband and I were looking at houses, we noticed the closer the deadline loomed, the more people were willing to pay to meet that November 30th deadline. In some cases, this elevated the price to more than we felt the value of the house was, but we didn’t hear the banks or real estate agents complaining.

But is it worth it?

With allegations of rampant fraud and escalating costs, is this program worthwhile? Is this credit keeping prices artificially inflated? Is the cost worth the benefit?

In all honesty, from a strictly economic perspective, the cost to benefit ratio probably does not justify the credit extension. The cost of the man hours alone to track down fraud from four-year-old home buyers and other creative accounting may negate any economic benefits.

What is the non-economic worth?

There is more to real estate than the comp value. When I lived in Las Vegas, our neighborhood was desperately suffering from foreclosures. You could actually feel the strain in the air with all of the vacancies, foreclosure notices, and for sale signs. Between prices plummeting and the First Time Home Buyer Credit, families started to come back into the homes. When houses sold, people were so relieved they went to “meet the new neighbors.”

In some cases, grandparents that had lived in the neighborhood since it was built, saw their children move back with their children in tow. Someone who buys a home, lives in a neighborhood, and cultivates stability and relationships holds untold social value.

Say the figures are right, and “only” 150,000 to 400,000 home purchases can be directly attributable to the credit. If each of those homes signifies hope for a neighborhood, I know a politician somewhere, will claim success.

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A.B. writes about graciously building wealth through thrift and putting the stereotypical notion of a "tightwad" on its tush at Modern Tightwad. For frugal tips and money management solutions with a tightwad twist visit her website or subscribe to her feed..

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