New Tax Credit for First Time Home Buyers – New for 2009

On Wednesday, February 25, 2009, the US Department of the Treasury announced a new tax credit for first-time homebuyers. This is part of the Obama administration’s American Recovery and Reinvestment Act of 2009 and is designed to give first-time homebuyers in 2009 a tax break of up to $8,000.

The most important aspect of this new tax credit that buyers should be aware of is that it can be used to offset 2008 or 2009 taxes. The home must be purchased before December 1, 2009, and it is a legitimate tax credit. The previous first-time homebuyer tax credit was designed to be paid off over time.

Tax credits can be helpful to the economy for a number of reasons, so this aspect of Obama’s mortgage relief plan is a welcome one. Giving homebuyers a credit against their income taxes can encourage more people to buy homes while also being able to keep more of their hard-earned money at tax time.

However, the government is also trying to achieve too many contradictory goals. This latest tax credit is supposed to stimulate the housing market and make it cheaper to buy a home for new buyers. But the government is also trying to “stabilize the housing market” and prevent property prices from falling further, making it more expensive to buy a home.

In addition, the Obama administration has introduced sweeping new spending programs, including the nearly $800 billion stimulus package and the $275 mortgage rescue plan. A new tax credit will reduce revenue for the federal government, which will have to rely on borrowing or printing money to finance programs, which will have to be paid for.

At the same time, in his address to a joint session of Congress and the nation Tuesday night, Obama also pledged to cut the deficit in half by the end of his first term. This will require even more tax revenue to accomplish, if the government does not default on its debt. But it is not clear how we can achieve a reduction in spending and the deficit along with taxes.

Consumer credit also presents an issue on which the government has issued contradictory statements. Congress realizes that giving loans to people who could never repay them had caused the bubble in house prices and the lack of lending guidelines by banks led to massive defaults and record rates of foreclosures.

Yes, the government has spent hundreds of billions and even trillions of dollars in these same banks to try to get consumer credit flowing again. But credit can only flow to the very people who received loans and were unable to pay them back. Giving these people more mortgages and car loans will only increase bank defaults and bankruptcies.

So what is the government encouraging? Better credit standards or more consumer loans? Big new spending or a reduction in current public debt? Tax credits or the need to sacrifice to preserve the government’s credit rating? Keep home prices artificially high or make housing more affordable for the less well-off?

Because all of these actions involve government intervention in the economy, the markets don’t know how to react except by selling off. It is impossible to predict which companies will be rescued, which will be nationalized and which may go bankrupt. The government is introducing more uncertainty than ever into the markets.