Stimulating the Stimulus: Helping New Homebuyers

This year’s stimulus bill offers a refundable tax credit of up to $8,000 for new homebuyers, generously defined as anyone who hasn’t owned a principal residence during the past three years. That’s a pretty sweet deal that could help boost sagging real estate markets.

But credit market woes have led mortgage companies to tighten their lending requirements. Gone are the days of low or no down payment, and for some potential new homebuyers, that poses a substantial hurdle. The $8,000 could help  cover a down payment but for one big problem: You get the credit only after you buy the house and file your tax return. The stimulus bill allows homebuyers to claim the credit on their 2008 returns, either initial or amended. But that’s still too late to provide the necessary upfront cash.

Enter the states to the rescue. Led by Missouri, at least eleven states have created ways to help buyers cover down payments or closing costs by advancing the credit. Participating states offer qualifying homebuyers low- or no-interest loans—typically as second mortgages due when buyers receive their tax credits. Washington Treasurer James McIntire is lobbying the Obama administration to let borrowers assign their credits to the states so that loan repayments would come directly from the IRS, something not currently allowed under IRS regulations. Sending funds directly to the states would both guarantee repayment and make more funds available to help homebuyers.

So far Colorado, Delaware, Idaho, Kentucky, New Jersey, New Mexico, Ohio, Pennsylvania, and Tennessee have joined Missouri, and others are likely to follow. Washington State residents can use existing programs in conjunction with the federal credit.

In our report card on the stimulus bill, TPC gave the new homebuyer credit low marks because it is poorly targeted and gives windfall gains to some people who would have bought houses without it. These new state programs will only make those problems worse. But we also predicted the credit would help perk up weak housing markets. State programs to advance the credit should boost that piece of the stimulus bill and help get housing going again.