On Wednesday, February 25, 2009, the US Treasury Department announced a new tax credit for first time home buyers. This is part of the Obama administration’s American Recovery and Reinvestment Act of 2009 and is designed to give those purchasing a home in 2009 for the first time a tax break of up to $8,000.
The most important aspect of this new tax credit for buyers to be aware of is that it can be used to offset either 2008 or 2009 taxes. The house must be purchased before December 1, 2009, and is a legitimate tax credit. The previous tax credit for first time home purchases was designed to be paid back over time.
Tax credits can be helpful to the economy for a number of reasons, and so this aspect of the Obama mortgage relief plan is welcome. Giving home buyers a credit against their income taxes may encourage more people to purchase homes while still being able to keep more of their hard-earned money at tax time.
However, the government is also trying to accomplish too many contradictory goals. This latest tax credit is supposed to stimulate the housing market and make purchasing a home cheaper for new buyers. But the government is also attempting to “stabilize the housing market” and keep real estate prices from continuing to fall — thereby making it more expensive to buy a home.
Also, the Obama administration has put forward vast new spending programs, including the nearly $800 billion stimulus package and the $275 mortgage bailout plan. A new tax credit will decrease revenue to the federal government, which will have to rely on borrowing or printing money to fund the programs — both of which will have to be paid for.
At the same time, in his speech to a joint session of Congress and the nation on Tuesday night, Obama also pledged to cut the deficit in half by the end of his first term in office. This will require even more tax revenue to accomplish, if the government does not default on its debt. But how we can have spending and deficit reduction along with taxes is unclear.
Consumer credit also presents an issue on which the government has issued contradictory statements. Congress realizes that making loans to people that could never pay them back had caused the bubble in real estate prices and the lack of lending guidelines by banks led to massive defaults and record foreclosure rates.
Yes, the government has shoveled out hundreds of billions and even trillions of dollars to these same banks to attempt to get consumer credit flowing again. But credit can only flow to the same people who were given loans who could not pay them back. Giving these people more mortgages and car loans will only increase defaults and further bankruptcy the banks.
So what is it that the government is encouraging? Better lending standards or more loans to consumers? Vast new spending or a reduction in current government debt? Tax credits or the need to sacrifice to preserve the government’s credit rating? Keeping home prices artificially high or making housing more affordable to those least creditworthy?
Because all of these actions involve government intervention in the economy, markets do not know how to react except by selling out. It is impossible to predict which companies will be bailed out, which will be nationalized, and which will be allowed to fail. Government is introducing more uncertainty into the markets than ever.