Will the sun set on “First Time buyers tax credit”?

The count down is on!! On November 30th the Obama administrations “First Time Buyer Credit” is due to expire and many are asking the question, will it be renewed. What do I think? YES! and here’s why, I believe that Senator Isakson’s bill will pass; his legislation would increase the maximum amount of the tax credit from $8,000 to $15,000 and expand the current tax credit so that it applies to any buyer of any home, not just first-time buyers. His legislation also would eliminate the income caps of $75,000 for an individual and $150,000 for a couple under the current tax credit so that there is no income limit for eligibility. Finally, the legislation would extend the tax credit for one year from date of enactment and would still allow home buyers to claim the credit on their 2009 tax return for purchases made in 2010.Should this proposal pass it would double the size of the current program and it would change it from ‘first time buyer’ to ‘anyone goes’. Also, the FHA will make available 90% mortgages at low rates, increasing from the current 96.5% LTV.

On September 17th the IRS came out with this headline: First-Time Homeowner Credit Provides Tax Benefits to 1.4 Million Families to Date, More Claims Expected…. I believe that we can reasonable assume that the $8000 credit could result in 2mm homes being sold. Taking that into consideration, how many homes will be sold with a $15k incentive that is available to all? 4 million is probably a safe number. But let’s say 3 million to on the conservative side. If that becomes realities and the average price of a home is $200,000 (conservatively speaking) that would translate into a total sale value of about $600 billon, the direct cost to the government would be about $45 billon and the total equity required by the private sector, net of subsidy would be around $15 billon(the equivalent of only 2% down) so the FHA would end up guaranteeing an additional $540 billon in new mortgages

Now remember these are merely assumptions, but if these positives were to occur this would usher in a back door bailout of the GSE, giving them the ability to off load some of their REO inventory. It could and would reduce the cost of short sales that will come in next year.

In a nutshell, the FHA would explode with new activity, dramatically increasing their cash cushion and that would temporarily bail them out. The econonomic activity related to the sale of 3mm homes will pump up the GDP. Example; the real estate commissions alone would be $30 billion, mortgage brokers would rake in 6 billon, lawyers, title & escrow another 6 Billon, This pumping up of current consumption could be a good thing for housing market sector, but especially interesting is how the big benefit would be to the publicly traded homebuilders, how much clout does this group have? Plenty, it just so happens that Senator Isakson’s family owns one of the largest private real estate brokerages in the country.

Consequently, if the tax credit isn’t renewed… look for the housing market to suffer the same fate of the auto industry at the end of the cash for clunkers program.