Fate of tax credit hinges on necessity - By Mary Ellen Podmolik Chicago Tribune 09-11-2009

Fate of tax credit hinges on necessity
By Mary Ellen Podmolik
The Chicago Tribune
September 11, 2009

You can expect to hear a lot more from the housing industry about the approaching expiration of the first-time home buyer tax credit now that Congress is back in session.

Various segments of the industry have been rallying their troops at a grass-roots level for much of the summer. With the calendar inching ever closer to the end of November, home builders, real estate agents and mortgage bankers plan to raise their collective voice. They seek to extend the $8,000 credit past the Nov. 30 date by which all home sales must close, make it available to all home buyers and expand it to $15,000.

But while there's consensus within the housing industry that an extension would lead to more sales, with every recent month have come new sets of data that are leading some to question whether it's really still needed.

The housing market already has seen an ever-so-slow recovery, although there's still plenty of ground to reclaim from just a year ago. In the Chicago area, for instance, homes sales in July posted their sixth consecutive monthly improvement.

A lot of first-time buyers are entering the market, but it's impossible to tell whether it's the tax credit nudging them off the fence, lower home prices, attractive mortgage rates or some combination of all three factors.

So here's the conundrum: If you take away the tax credit and sales fall, does that mean the recovery was manufactured and not real? If you extend or expand the credit, are you supporting, at the government's expense, a recovery that would have taken place anyway?

And what happens if Congress does something to keep the credit but interest rates and home values creep up. Do potential buyers reposition themselves on the sidelines?

Home prices in the Chicago area during the past three months rose 19.9 percent from the previous three months, bringing values more in line with the end of last year, according to Clear Capital, a housing market data provider. Traditional sales are gaining traction; 34 percent of the sales in the past three months were of distressed properties, down from a peak of more than 42 percent last winter.

As a result, the inventory of existing home supply is shrinking and now stands at 7.7 months, the lowest since August 2007, according to Lance Ramella, a principal at RW Real Estate Advisors in Oak Brook.

"This is the best market we've ever had in history," Ramella said. "We're seeing a lot of positive news in the housing market these days, and the more positive news we have, the less inclined Congress is going to write [an extension] into a bill."

David Kittle, chairman of the Mortgage Bankers Association, agrees that it's home affordability that drives sales, not a tax credit, but he doesn't buy the notion that a tax credit extension will cost more than it's worth. Kittle, whose trade group estimates that a $15,000 tax credit for all buyers would spur an additional 400,000 home sales, thinks an $8,000 credit for all buyers for all of next year would be a fair compromise.

"It doesn't add to the government tab," Kittle said. "Every time somebody buys a house, that purchaser spends an average of $7,500 on [items for] the house. That's really money the government is not putting out and that creates jobs. This industry leads the country out of recession every time."

For builders, their opportunity to benefit from the credit is largely past because a consumer who orders a home today would be unlikely to close on it by the current deadline. So, the National Association of Home Builders is pulling for the extension to get a little more steam in the engine.

David Crowe, the home builders' chief economist, believes a substantial amount of the sales uptick is due to the tax credit, and that the housing market hasn't embarked on a true recovery yet.

"We're not sure that momentum is built," Crowe said.