With the housing industry facing its greatest crisis since the Great Depression, the National Association of Home Builders recently called on Congress to move quickly to enact a second round of economic stimulus directed squarely at the housing sector — including a tax credit for the purchase of a home.
"The biggest bang for the buck most likely would be provided by a temporary home buyer tax credit," NAHB Chief Economist David Seiders told the Senate Finance Committee on Feb. 28. "Tax credits for the purchase of a home are a means of eliminating excess inventory, relieving some of the pressure on falling housing prices and ending the waiting-on-the-sidelines strategy some potential buyers have adopted in response to overly negative media stories concerning the future of the housing market."
The recently enacted Economic Stimulus Act of 2008 could fall short of achieving its intended results because it does not address the problems posed by the housing contraction that are at the root of today's economic and financial market problems, he said.
"The U.S. housing market now is in the contraction phase of the most pronounced housing cycle since the Great Depression," Seiders said. "Single-family housing starts are already down by 60 percent from their peak at the beginning of 2006 and the bottom is not yet in sight. Congress can, and should, do more."
There are many models that Congress can look to when designing home buyer tax credits. The District of Columbia, for example, offers a $5,000 tax credit to first-time home buyers for the purchase of a new or existing home.
With housing affordability improving over a year ago, a national first-time home buyer tax credit would stimulate buyer demand among households that do not have a home to sell. In turn, those who sell their existing home to a first-time home buyer will purchase another home and spur additional economic activity.
A similar version of a home buyer tax credit was used successfully in the mid-1970s when Congress established a temporary tax credit for the purchase of a newly-constructed home to help clear off a then-record number of unsold homes on the market.
NAHB cited the efforts of several senators who are seeking similar solutions. For example, Sen. Debbie Stabenow (D-Mich.) has introduced S. 1988, legislation that provides for a temporary, one-time refundable tax credit for first-time home buyers of 10 percent of the purchase price of a principal residence.
Additionally, Sen. Johnny Isakson (R-Ga.) introduced S. 2566, a bill creating a one-time $15,000 tax credit for purchasers of a single-family principal residence that is a newly constructed home or a home in default or foreclosure purchased within a one-year time period.
"What is common among these tax credits for the purchase of a home is that they represent policies that increase housing demand, thereby enabling home purchases for families, and fight falling housing prices, which threaten the economy as a whole," Seiders said. "We recommend a targeted home buyer tax incentive in order to maximize induced purchases."