February 5th, 2009 9:16 AM by Lehel Szucs
As Congress continued to move rapidly toward completion of landmark legislation to stimulate the sputtering U.S. economy, leading national economists cautioned that the package is unlikely to succeed without provisions to restore home buying demand and address housing problems that are the root cause of the worst recession since the Great Depression.With the Senate expected to vote on its version of the stimulus bill the middle of this week, NAHB has been coordinating a major grassroots push across the country to alert lawmakers on Capitol Hill that reviving housing demand through a beefed-up tax credit for home buyers is essential to restoring the confidence among consumers and in the financial markets needed to revive economic growth.
“The housing market is hurting and hurting bad,” said NAHB President and CEO Jerry Howard. “Unless Congress takes bold action to help housing in its economic stimulus package, things will only get worse.”
In the $819 billion stimulus bill passed by the House on Jan. 28, eliminating the recapture provision of the $7,500 tax credit for first-time home buyers was the sole item aimed at addressing the devastating impact of the housing downturn on the general economy, with the financial crisis and job losses continuing to escalate at an alarming rate and housing activity sinking to its lowest levels on record.
The stimulus measure adopted by the Senate Finance Committee the day prior to the House vote would also eliminate the need for first-time buyers to repay the tax credit and, moving a small step in the right direction, would extend the availability of the credit for an additional two months, until Sept. 1.
NAHB is seeking an extension of the credit through the end of this year. Among other enhancements to the credit that would make it an effective vehicle for leading economic recovery: the amount of the credit would be increased, ranging from $10,000 and up, based on housing prices in local markets; it would be available to all home buyers, not just those buying a first home, with income limitations; and it would be available at closing to be used as a downpayment.
“The tax credit would be available only until the end of the year,” said Howard, “sending a strong signal to families who have been sitting on the fence that they need to act quickly to take advantage of this opportunity. Housing affordability has improved markedly around the nation, and there is pent-up demand from new households who need housing, so we believe the credit would spark the activity the economy needs to stop shedding jobs and begin creating them.”
The Importance of Housing
Economists participating in a Jan. 28 teleconference to discuss the importance of including housing in the congressional plan to save the economy emphasized that housing — which is responsible for 15% and higher of the gross domestic product during normal times — is in the best position to lead the recovery, which is the role it has traditionally played throughout the history of America’s business cycles. Also, ending the downward spiral in housing prices ought to be the first priority of efforts to halt further economic deterioration, they said.
“Three million home building-related jobs across the country have been lost as a result of the slowdown in housing production, which represents $145 billion in lost wages and $4.9 billion in lost purchases,” said NAHB Chief Economist David Crowe.
“Deterioration in these jobs has now spilled over into virtually all sectors of the U.S. job market and the economies of states across the country,” Crowe said. “Consumer and builder confidence measures are at an all-time low and foreclosures continue climbing to record levels.”
David Lereah, president of Reecon Advisers and a former chief economist for the National Association of Realtors®, noted that housing affordability has increased significantly over the past year with sharp declines in home prices and the cost of mortgage financing. However, tighter mortgage lending standards — particularly downpayment requirements — have prevented many prospective buyers from being able to buy homes. The tax credit proposed by NAHB, he said, would remove that obstacle by enabling borrowers to use it for a downpayment.
“Falling house prices are clearly the symbol of this economic crisis,” said Dwight Jaffee, professor of finance and real estate at the Haas School of Business, University of California at Berkeley.
“If we are going to have any form of significant economy recovery, the freefall in homes prices that we continue to observe must be stopped,” Jaffee said. “We don’t see success in foreclosures until we get the prices to stop falling. Consumer sentiment won’t turn, employment won’t rise and expenditures won’t increase until we can stop this freefall,” he said.“Once you stop the freefall, and get home sales going, the multiplier to the rest of the economy is enormous. In fact, every key economic indicator — gross domestic product, consumer confidence and housing market activity — rebounds significantly faster if housing is included in the stimulus package.”Jaffee cited the findings of a recent study conducted by California-based consulting firm LECG LLC showing that a significant tax credit for all home buyers and buying down mortgage interest rates through the end of this year would:
Increase the GDP by 1% annually Create 940,000 new jobs annually Increase average home owner equity by more than $25,000 by 2012 Increase aggregate home owner equity by more than $2 trillion by 2012 Generate revenues at the federal and state level that would exceed the cost of the program.
“This creates a positive, virtuous cycle instead of the vicious cycle we are in,” he said.