Is The US Housing Tax Credit Coming To An End?

Is the clock about to strike midnight for the Federal tax credit to support housing?

Uncle Sam has implemented a wide array of programs to support the domestic housing market. These programs include:

1. Mortgage modifications.

2. Massive funding support for Freddie Mac (FRE), Fannie Mae (FNM), and the Federal Housing Administration.

3. Increasing the loan limits on mortgages eligible for purchase by Freddie and Fannie in certain regions of the country.

4. Capital injections into a number of large banks and mortgage originators via the TARP.

5. An $8k tax credit for new home purchases.

Of all of these programs, most analysts believe the tax credit has had the largest positive impact. Why has that happened? In my opinion, the tax credit directly impacts the buyer while the other programs are an attempt to support housing but are as much or more supportive of the financial organizations than the homebuyers.

That said, all of these programs are funded by Uncle Sam and at some point in time even a socialized housing program needs to operate within the confines of a budget or limits.

To that end, the primary reason for today’s selloff in the equity markets is a story circulating from International Strategy and Investment. Who is ISI?

ISI consists of two parts: ISI Group Inc., a registered broker-dealer, and ISI Inc., a registered investment advisor. ISI is engaged in investment research, sales, trading and portfolio management with offices in New York, Washington DC, Alabama and Beijing.

What did ISI have to say about the housing tax credit? Bloomberg reports, Housing Credit Will Likely Be Phased Out, ISI Says:

The U.S. Congress will probably phase out the tax credit for first-time home buyers, according to a note sent by ISI Group Inc.’s Washington research analysts.

“There could be an agreement reached as early today on the Reid/Baucus amendment that would PHASE OUT (not extend, as we originally understood when the idea was first proposed last week) the home buyer tax credit,” ISI analysts said in the note. “The phase out is worse than a straight extension and probably worse for housing than the consensus.”

I have been supportive of providing a tax credit to support our housing market. Tax credits, however, can not go on for perpetuity. If that were the case, they are not a credit . . . they are a subsidy. As such, the subsidy skews the long term health and well being of a properly functioning market.

While the equity markets have had approximately a 2% retracement today and may retreat further without the tax credit to support housing, I actually view a discontinuation of the credit as a positive. Why? Let the market work. Let homebuyers purchase homes which they can truly afford without the assistance of Uncle Sam. Let the local housing markets find levels where buyers and sellers will naturally transact without the presence or influence of Uncle Sam.

It’s called capitalism.

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