In an effort to jump-start the ailing housing market, Sen. Johnny Isakson, a Republican from Georgia (and a former real estate professional) has introduced legislation that would beef up the tax credit for first-time home buyers. Under the terms of his bill, which was introduced Wednesday, the size of the credit would expand to a maximum of $15,000 from the previous cap of $8,000, and it could be taken by anyone who buys a primary residence, instead of only by first-time home buyers. The bill would also remove the income limits that had prevented individuals making more than $75,000 a year from claiming the credit, which would be available for a year after the date of the bill's enactment.
Isakson played a crucial role in establishing the $8,000 tax credit and believes it has been successful in bringing first-time home buyers into the market. But he argues that the current tax incentive is insufficient because it misses a second set of buyers who are essential to a housing recovery. "We don't have a recession in first-time home buyers," a statement from the senator said. "We have a recession in the move-up market." The legislation aims to convince these "move-up" buyers that, despite falling real estate prices and mounting job losses, now is the time to buy that larger house.
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Bringing the move-up buyers back into the market is a key for a housing recovery, says James Gillespie, president and chief executive of Coldwell Banker Real Estate. "There are so many people out there that have had a lifestyle change that has taken place in their families in the last three or four years—whether it is a birth, multiple births, a marriage, a job promotion—and they are either still in their apartment or they are in their starter home or their second home, knowing that they should be moving up," he says. Given the current market turbulence, many such buyers remain on the sidelines because they are concerned that if they buy a home today, it could decline in value in the future. "A $15,000 tax credit takes that [concern] off the books," Gillespie says.
Senator Isakson's bill would give a significant boost to the real estate market, says Mark Zandi, chief economist at Moody's Economy.com. "I think it would have a meaningful impact on the housing market," Zandi says. "I don't think it puts an end to [the slide in home prices], but I think it helps to ensure that they don't crash further."
Industry groups have thrown support behind efforts to expand the first-time home buyer tax credit. The Business Roundtable pledged its support this week for key provisions of Isakson's bill, and the National Association of Realtors and the National Association of Home Builders also are in favor of expanding the scope of the credit.
But Isakson's bill faces an uphill battle in Congress. With the public growing increasingly frustrated with federal bailouts and massive government spending, lawmakers won't be eager be to sign off on a second handout for home buyers. Isakson says his bill would cost about $32 billion over one year.
"The overall concern is the funding," Gillespie said after he returned from a trip to Washington to rally support for expanding the tax credit. Gillespie met with a handful of members of Congress, including House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat.
"Is there going to be any dramatic action [on the legislation]? I don't think so," Gillespie continued. "But the message was definitely heard, and they totally understand that housing is vital to our economy."
"In the Senate, I think it will pass. It's the House where I worry about the most opposition," Isakson said in an interview.
Could that outlook change? It's possible. If mortgage rates—which have gone up sharply in recent weeks—continue rising, Congress could come to see the expanded tax credit as a viable option to offset escalating housing costs. Or another sharp drop in housing or economic data could convince lawmakers that additional tax incentives are needed. "My guess is that if the economy does continue to struggle . . . if these rates stay higher and the scenario that the recession will end this year is wrong, then there will be another stimulus package early next year, and [the expanded tax credit] could be part of it," Zandi says.