NC $10,000 home buyer tax credit?

For the first time in 112 years both the upper and lower chambers of the North Carolina General Assembly majority control is by members of the GOP. And just like in 2008 when Democrats swept Republicans from office these new legislators rode the wave of anti tax and spend big government sentiment culminated by the Obama Administration who has been tone deaf to American voters and their sentiments towards its  policies that have been underwritten by Pelosi’s 110th and 111th Congress.

This is the same wave of dissatisfied voters that delivered to the US House of Representatives its biggest single election defeat of a party in power for more than 70 years and eliminated the filibuster proof super majority that Senate Democrats enjoyed. Meanwhile Democrats in charge of all three houses of power in Washington for the past two years have been legislating and spending like frat boys and sorority sisters on spring break with their daddy’s borrowed American Express cards! It’s no wonder that according to a recent Rasmussen poll a whopping 57% of Americans are okay with Government Shutdown if it leads to deeper budget cuts.

Cash for Contractors

North Carolina’s General Assembly to consider a $10,000 tax credit for persons who purchase a “a newly constructed home”

Now it appears that some in our states capital along with the very powerful lobby that we call the NC Homes Builders Association have come up with a scheme to entice would be home buyers not to buy existing homes that are already discounted, on the market and ready to occupy but instead to purchase newly constructed or yet to be constructed homes and they will have no other choice but to use borrowed money to do that. You see North Carolina, like a majority of all of these United States is broke. North Carolinas Governor Bev Perdue has presided over one  of the largest budget deficits in the state’s history, currently estimated at $2.5 Billion.

However unlike the federal government North Carolina cannot print aways its debt like the Fed is attempting to do because according to  federal law states states are required to have balanced budgets (unlike the federal government) and yet Senators Apodoca, Allran, D. Berger, Brown, East, Goolbsy, Gunn, Hartsell, Hise, Hunt, Jackson, Jenkins, Mansfield, Pate, Preston, Rabon, Rouzer, Souck, Tillman, Vaughan, Walters and White all feel that is a very good idea to sponsor Senate Bill 476 to stimulate new home purchases by granting a tax credit of $10,000 to “An individual who purchase or contracts for the construction of a new home residence”

Quote of the week According the NCHBA;

“We’re looking at ideas on how to create jobs. This creates jobs in that (one-year) window of time.”–Rep. Harold Brubaker (R-Randolph) speaking about the merits of HB 485 New Home Purchase Stimulus.

According to D. Michael Walden, Reynolds Distinguished Professor of Economics at NC State University the tax credit proposal will create 16,199 new jobs (14,727 related to construction spending and 1,472 related to direct consumer spending),  The job creation numbers are based on Dr. Walden estimate that 2,873 new homes will be constructed and sold as a result of the credit that would not otherwise have occurred.

Don’t get me wrong, I have no objection to someone purchasing or contracting to buy a new home, nor do I object to the fact that homebuilder do in fact employ people even if it appears to that a lot of those in this state might be illegal aliens (but that is for another discussion) but will someone please tell me how giving someone a $10,000 state tax credit is going to stimulate anything except perhaps the anger of a very alert consumer of the legislative process who happens to be the voter? The very same voter  who has shown every little patience of late for these types of parlor tricks?

People Buy Houses because it is the right choice for them at that time.

Just last week (April 1) I took a call from a would be renter who is relocating to Cary North Carolina  from another state. I say would be because he spent all of last week driving around Cary looking at homes to rent. He was ready to pull the trigger on a rental agreement when a builder in Cameron Pond suddenly dropped the price of a home they had looked at the day prior by $20,000 or what amounted to a 5% overnight discount. This discount and the decision of the builder not the prospect of a tax credit along with his decision that he preferred to own at that price rather than rent was what prompted him to buy today and not one tax payer dollar was spent! I cant say for sure if this means that housing prices in Raleigh and Cary north Carolina need to come down another 5% to move the abundance of existing inventory but what I know for sure is that in this one case, that was the factor that caused him to buy now instead of renting.

I wonder if any of these lawmakers even tried to get a construction loan from a bank lately? If the they had then they would know that qualifying for a regular mortgage is tough but you practically have to walk on water to obtain construction financing. Who else other than the large regional & national builders who can afford to put up spec homes will actually benefit from this scheme? In the long run wont this simply continue to fuel the problem that is the abundance of existing homes for sale on the market?

Real Estate Prices and Mortgage Rates in Raleigh are lower than they have been in a decade!

Consider this; prices for both new and existing homes have fallen to a nine year low and mortgage rates have fallen to their lowest levels and remained there for more than a year since before 1971 when Freddie Mac the nation’s second largest insurer of mortgages began keeping records! You would have to go back to the Truman administration to find rates this low! Even though it cost only slightly more to buy a home today that it did in 2002 it is actually significantly cheaper when you consider the average mortgage rate today for a 30 year fixed rate mortgage is only 4.86% compared to 2002 when it was 6.89% and then you consider the price then and compare it to the price today yet still consumers wont buy them.

The chart below will help compare the same home purchased in 2002 and 2011 both with 20% down payment and both at the comparable then and now 30-year rates. If that alone isn’t reason enough for someone to purchase a home today, then please tell me how exactly redistributing the wealth from one taxpayer to another is by adding MORE housing units to an already bloated market is going to stimulate home sales?

Year Purchased 2002 2011
Average Sales Price $156,000 $178,000
20% Down Payment $ 31,200 $ 35,600
Loan Amount $124,800 $142,400
Interest Rate 6.89% 4.86
Monthly Principal; & Interest Payment $821.10 $752.30

Without cost adjusting for inflation and simply comparing the payment then to the payment today, anyone with a grasp on simple math can see what a bargain housing is today in Raleigh. This pathetic attempt at stimulating home sales will actually succeed at nothing more than angering voters who have twice in the past two years shown their willingness to “throw the bums out” who didn’t listen to them regardless of political affiliation!

Speaking of which, if you agree that this is another foolish attempt to at gerrymandering that which ails the economy and you would like to give your state Senator and Representative a piece of your mind, then click here to look up by your voting records who they are and make sure they know that you are watching what they do on Jones Street.

Since relocating from Northern Michigan in 2007 I have lived in Garner (27529) with my wife Melanie and our four children. With personal production of 8MM in real estate sales across Southern Wake County I am considered to be a local market expert in the following communities: Garner (27529), Fuquay-Varina (27526), Holly-Springs (27540), Apex (27502), and Raleigh (27603, 27604, 27606, 27609, 27610)) which spans from downtown Raleigh to Willow Spring including Lake Wheeler. Call or email me, I’m here to help! Ricardo Cobos (919) 526-0183

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  1. As an American, I can’t accept the notion that shutting down government over less than 1% of the overall budget is a justified means of accomplishing a goal. This would be the equivalent of denying all the children in school lunch because most of them did not want to eat their peas.

    Let’s not forget the point of government is to work for the people, not against it.

    1. Jason – thanks for your thought provoking comments. I’m still scratching my head though – I agree that government is *supposed* to work *for* the people and so I don’t advocate shutting down the government unless it is necessary to restore sanity, although I am pretty sure that 50% or more of our federal could be permanently shut down without any negative impact on society.

      I’m still scratching my head on the school lunch and peas analogy and how using public money to induce customers of private business applies here; perhaps you could clarify.

  2. Ricardo,

    well thought and written article.

    I believe that the incentives should be eliminated/reduced and money spent on creating jobs. Job growth will eventually improve the housing market, and will be sustainable.

    I wonder when will our politicians start working on any long term recovery efforts.

    Nice article, thanks for sharing with us.

  3. Great article! I agree, I think it is absolutley ridiculous that our government would give an incentive for only new construction. I say all home buyers receive the incentive or none at all!

  4. Well written article. I think the argument can be made for or against this initiative depending on which side of the argument you are on…. Housing is the core stone of our economy. Anything that adds jobs to our sectors should technically be well received. Builders, as any other sector will lobby for incentives and changes that will benefit their business at cost of the “greater good” (i.e. state budget). That’s fair and expected in this great country of ours. Having said that, today does not appear to be the right time to give a $10,000 break to exclusively new construction from the state’s already horrendously depleted budget. In my opinion, it would serve us all better as an industry to direct lobbying efforts into amending lending guidelines where sellers would be able to contribute to the 3.5% down payment requirement on FHA loans, for example….

  5. Excellent points, Ricardo – as you state, people who can buy homes WILL buy homes, these incentives cannot/should not encourage people who have no business buying a home to make that decision. Isn’t that how we got into this mess in the first place – people buying homes they could not afford? There’s no shame in renting, and there’s no God-given right to “own a home” in America. But when you can afford – and don’t rely on government subsidies to do it.

  6. No surprise. People with lobbyist money to throw at weak, dimwit politicians most always win. Look at Banks versus brokers. Banks win, and most likely so will deep pocketed national builders.

  7. Thank you! So many in the real estate business get excited when the government sticks it’s nose in and offers incentives to people to buy a home. The reason is because more commission can be expected if people are “coaxed” — with an extra $10,000 — to purchase a home. Very seldom do we step back and realize that the short-term gain of a commission on a closed home sets up the scenario for tomorrow’s foreclosure or short sale. $10,000 is enough money to allow someone to buy a home who (without it) could not afford to do so. Thank you for shedding light on the short-sightedness of this thinking. I want a good, stable, real recovery in the housing market…not a government-propped bubble with “good” numbers to report. Agree with your article completely.

  8. Ricardo,
    Tell those builder friends of yours that I have a 95% Construction Perm product that they can help me sell to their clients!!
    Good article. Keep up the good work.

  9. Excellent. It is always a good thing when thought provoking and informed ideas are brought to the forefront. Thanks Ricardo

  10. This is an excellent and well thought out article that brings to light many important and valid points. I’m glad that Ricardo is keeping an eye on issues like this one that so affect the quality of life in our great state. Thank you! Let’s hold Bev’s feet to the fire on this one!

  11. In 2008 I wrote “BOTH” presidential candidates…with the idea of giving a 8-12k rebate to buy a foreclosed home. If they are off the market the remaining homes rise in value, as well as people are needed to rehab many of these homes. But did they do…gave a rebate on 1st time home buyers…i’m still trying to figure that 1 out.

    1. Steve – thanks for the comments – while on the surface your idea appears to be a good idea, we certainly dont need to be throwing borrowed government dollars at this problem and further perverting the natural correction of the real estate markets.

      Consider if you will this – the banks and lenders already have priced the house to sell and so it will sell. The trouble isn’t the million homes on the market that are foreclosed (REO properties) or even the estimated 1.8MM homes in the so called “shadow-inventory”. These homes WILL sell and in fact most often time they do in very short order because in some markets that have been deeply impacted by REO Properties those homes can make up a majority of the homes that ARE selling.

      If we allow our government to continue artificially further stimulate that singular areas of the economy category we will continue to harm the average guy who lost his job, was downgraded in salary or for whatever reason really needs to sell his home because presumably he can’t offer a 10 or 12 thousand dollar “kick-back” like the state and federal government can.

  12. How is this going to stimulate the market? The reason we are in this situation is because people can not sell their existing homes and move along to the next. This proposal will lead more buyers to new construction and leave resellers in the dust. And another tax credit will simply create an artificial demand – and every action has an equal and opposite reaction.

    1. Ricardo,

      You have “hit the nail on the head” (obvious pun intended) with your article. This bill will do very little in the way of new jobs, and even less in getting the oversupply of existing homes for sale moving through the pipeline – which is an serious problem. What it might actually accomplish is lower revenues for the state, which will not help with the budget deficit.

      This legislative activity is not what a majority of North Carolina voters wanted when they sent the Republican party to Raleigh to govern.