First Time Home Buyer Tax Credit 2011

Home Buyer Tax Credit

In the aftermath of the bursting of the sub-prime mortgage bubble, the housing market went through drastic changes. As housing prices collapsed, people lost all of the equity in their homes. When adjustable rate mortgages reset to their higher rates, borrows could not longer afford to make their payments. Foreclosures skyrocketed and the banks were left with the keys. The banks suffered heavy losses as they attempted to sell these homes into a declining market. With the mounting losses and the weak economy, banks tightened their lending standards considerably. In many cases, banks were refusing to lend, even to creditworthy borrowers. This was the beginning of the credit crisis, which hamstrung the economy and drove the United States into recession.

It was in this environment that the government stepped up and took decisive actions to help stimulate the economy by boosting demand and opening up the credit markets. The government bailed out most of the major banks holding on to billions in worthless mortgage-backed securities, passed a stimulus package and engaged in two rounds of quantitative easing. However, most people had a hard time making sense of all these complicated maneuvers. Some of them were even heavily opposed by the voters. However, there was one program that was wildly popular among just about everyone: the First-Time Home Buyer Tax Credit.

H.R. 3548 Bill – The Unemployment Compensation Extension Act

The original law passed in 2008 provided for a $7,500 tax credit to anyone purchasing their first home. It was designed specifically to boost demand in a sagging housing market, which was already well on its way to losing 25 percent of its value from its peak prices. The credit was extremely popular with the home buyers and, along with extremely low interest rates, helped to temporarily prop up the housing market. Indeed, the program was so popular that President Obama extended the tax credit in 2009.

This extension allowed first-time home buyers to take the tax credit until April 30, 2010. Many people were hoping that the tax credit would be extended yet again. However, a First Time Home Buyer Tax Credit 2011 never came into being. The reason for this had much to do with the weakness of the economic recovery and the ballooning of the federal budget deficit.

The tax credit was costing the federal government a lot of lost tax revenue at a time when the government was already allocating hundreds of billions of dollars in stimulus spending. A First Time Home Buyer Tax Credit 2011 would just have further bled the Treasury of potential revenue while the federal debt was reaching $14 trillion. The debate in Washington shifted from economic stimulus spending to reducing the deficit, especially after the Republicans took control of the House of Representatives in the 2010 midterm elections.

Ultimately, the reason why a First Time Home Buyer Tax Credit 2011 was never implemented was that it simply would not stimulate demand enough to justify the cost. The American economy is still in a very precarious state. GDP growth has been anemic. Unemployment has been doggedly persistent and is still widely expected to be above 7 percent by the 2012 presidential elections. And some economists fear that the monetary policy of the Federal Reserve could lead to inflationary pressures. Indeed, we have already seen significant price increases in both food and oil over the past several months.

As for the housing market, prices still appear to be declining in most areas, despite the fact that 30-year fixed-rate mortgages can still be had for under 5 percent. And as long as potential home buyers continue to expect falling home prices, they will be reluctant to take out new mortgages. The lack of a First Time Home Buyer Tax Credit 2011 is only going to exacerbate this trend. And if home prices fall back to their pre-bubble valuations, they can be expected to fall an additional 25 percent.

In short, there is a significant oversupply in housing right now, and it may take a while for the economy to adjust. This adjustment may take even longer if the government is forced to further reduce aggregate demand through tax increases or spending cuts. But for potential new home buyers, the important point to take away from this is the fact that you should not expect a new tax credit anytime soon.