Part of the recent bailout bill includes a provision to allow a refundable tax credit of 10% of the home purchase price up to $7500 for new home buyers for purchases after April 9, 2008 and before July 1, 2009. A "first-time" home buyer is one that has not owned a home for three years prior to the purchase. By the way, ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.
The $7500 is a refundable credit, which means you get the credit regardless of whether you owe any tax at all. The government sends you a check if the credit exceeds your taxes less withholdings or if you don't owe any taxes.
Now here it really gets crazy. Turns out the credit is not really a credit but rather an interest-free loan from the government. Beginning in 2010 or 2011, you must begin paying $500 a year back for the next 15 years on your tax return.
Please someone straighten me out here on my logic. With the housing bubble bursting and homeownership at an all time high, should the government be helping new homeowners buy homes?
Let's use an analogy. The tech stock bubble preceeded the housing bubble. What would you think if the government proposed after the tech stock crash that if you purchased tech stocks, you would receive an interest free loan for 10% of your purchase price in order to "prop up" the valuations of the stock investments. Is this really any different? This would be ludicrous right?Do we want to encourage first-time home buyers to purchase homes given we already have the highest home ownership rate since at least 1960?
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Do we want to continue to artificially prop up the demand for housing by government subsidy and attracting those least able to afford a home to buy one because of a tax credit? What about all the people that are upside down in their home right now? Isn't that a more urgent problem than trying to cover the closing costs of a new home for first-time home buyers? Why are we helping people with taxpayer funds who have not even been harmed by the housing bubble burst? What is the difference between this and a back loaded mortgage? You pay $7500 less up front only to have to later come up with the money down the road. Doesn't this sound a little like what the mortgage companies have already been doing that caused the crisis?
So all you renters out there that can't afford a home, go out and buy one anyway. Just borrow the closing costs from a family member, pay them back with your tax credit.
Is this all a dream or do I just not get it or is this a gigantic mistake??