Wasteful $29 Billion Tax Cut Won't Help Housing: John M. Berry

Bloomberg -"Suppose you're trying to sell your house when a similar home down the street has a sign in its yard proclaiming, 'Foreclosure. Priced to Sell.'' You're probably already upset because the foreclosure likely has driven down the value of homes in the neighborhood. Then you learn that a law has just been passed giving a $7,000 income tax credit to anyone who buys a foreclosed property, further undercutting your asking price...More than $25 billion would be handed out to homebuilders over a three-year period in the form of rebates of income taxes paid during the height of the housing boom. The proposal would let homebuilders carry net-operating losses incurred in 2008 and 2009 for four years instead of just two as the tax code now allows...No, they're not keys to handling the housing crisis. At best, they would be a waste of taxpayer money. At worst, they might delay some of the adjustments that have to occur before the housing market can stabilize. The $7,000 credit, which would be paid over two years, is as likely to depress values as to prop them up. Why provide a credit to a buyer that's also going to help a lender sell a property when a hard-pressed homeowner in the same neighborhood is also trying to sell his property, possibly to avoid a foreclosure? Might that other owner not feel pressure to lower his asking price in the face of an effective reduction in the price of the foreclosed property?...Like the credit for someone buying a foreclosed property, the income-tax break for homebuilders could have a perverse impact and actually extend rather than shorten the current crisis...Avoiding the sale of land and the inventory of unsold new homes is exactly the wrong thing to encourage. Reducing the overhang of new homes is the real key to establishing a bottom for the industry. And until that is done, shoring up homebuilder bottom lines would do precious little to prevent layoffs...This legislation known as the 'Foreclosure Prevention Act of 2008'' should be called the 'Homebuilder Bailout Act.'''
April 7, 2008