For James Ahern and his wife, Kim Dobbins, President Bush's offer to give them $5,000 for buying their first home was welcome news. The Chicago couple had been looking for a house before the State of the Union message, and now they're ready to bid on a $220,000 condominium in Chicago's trendy Lincoln Park section. Speaking of the tax credit, Ahern says: "It's just icing on the cake."
Other house hunters may share Ahern's sentiment. The proposed tax credit seems to be a sweetener for buyers who were already browsing in a market that features eager-to-please sellers and low mortgage rates. If Bush gets his way, a first-time buyer--defined as someone who has not owned a home in the past three years--will be able to take a tax credit of up to $5,000, with the credit applied evenly against 1992 and 1993 taxes. The Administration claims the incentive will boost housing starts by 125,000 this year, to 1.2 million. That would increase new construction activity by about $12 billion spread over 1992 and into early 1993.
But many economists aren't convinced that the tax credit makes much sense. They're just as skeptical of a proposal to allow penalty-free withdrawals from individual retirement accounts for downpayments and one that would make capital losses for home sellers deductible. "Housing is already in an upturn," argues Lacy Hunt, chief economist of the Hongkong Bank Group.
In fact, housing starts have been rising slowly since last spring. And most forecasters expected the rebound to continue this year even before the President's plan. The National Association of Home Builders projects that without the credit, starts would have risen to 1.2 million this year, from 1 million in 1991. With the incentives, the NAHB projects that starts this year will hit 1.4 million and rise to 1.53 million in 1993 (chart). But that rise comes at the expense of starts in 1994 and 1995.
Congress must still pass the tax plan, but buyer traffic and phone calls to realtors have picked up in some areas. Says Eric Elder, marketing vice-president at Kaufman & Broad Home Corp. in Los Angeles: "We've had at least one sale written because somebody was confident they could pull money out of an IRA."
Most buyers who need to tap an IRA or could use the extra $5,000 are likely to wait until the legislation is passed. That means home sales may actually sink in the next few months. And even if the plan exits Congress intact, economists wonder if the White House is overstating the boost to the housing industry. "There is less family formation going on now than in the past, so there are fewer people who can take advantage of this," says Alan C. Lerner of Bankers Trust Co. In addition, since the plan applies to the purchase of existing as well as new homes, the effect on construction may be muted.
Even if all goes according to plan, the tax credit may make barely a ripple in the economy. The extra cash won't show up until early 1993, and by that time, the recovery should be chugging along nicely. The stimulus might not amount to much, anyway. Even if the government's estimate is correct that 250,000 home buyers would qualify, the credit would pump just $625 million into the economy in each of the next two years. That's piddling next to the more than $4 trillion consumers spend each year.
NOT EVEN CLOSE. The tax credit also does little to solve the biggest hurdle to home ownership: amassing the up-front costs, which can total $25,000 for a $100,000 starter home. Marcie Adary would rather see some help getting over that obstacle. "It's too hard to save up for a downpayment when you're trying to raise a family," she complains. Adary and her husband, Nadav, have been looking for a home near San Mateo, Calif., for about a month. But with homes in the area selling at around $300,000, their savings don't come close to covering the closing costs and downpayment. So they're looking into a lease option. That would allow them to lease a house with part of the rent going toward the downpayment.
If the credit market stays spooked, the Adarys may find lots of company in the just-looking category. In early January, 30-year fixed-rate mortgages averaged 8.31%, and 7.78% mortgages were widely available, reports HSH Associates, a New Jersey-based publisher of mortgage data. But by Jan. 30, the average had jumped to 8.83%. The higher rate will keep some families from qualifying for a mortgage.
Despite the recent uptick in mortgage rates, most economists still expect residential real estate to continue its slow mend. The lure of $5,000 checks may even add some vigor to a shallow housing rebound--for a while. But don't expect it to lay the foundation for a sturdy recovery.