I wasn’t paying close enough attention to this housing bill. I thought it was all about mortgage re-negotiation and foreclosure prevention (and it certainly offers help in those important areas). But I was surprised to read in today’s New York Times that it also aims at stimulating housing demand among first time homebuyers by offering a tax benefit that is essentially a 15-year interest-free loan (up to $7,500 depending on your tax status) for first time homebuyers purchasing a home between April 9, 2008 and June 30, 2009. The benefit begins to phase out for single people earning more than $75,000 or couples earning more than $150,000.
This loan (officially a tax credit/refund with required repayment over 15 years) will not make a huge difference for the average first-time home buyer, but it could have a meaningful impact on housing affordability and asset-building for lower-income home buyers (especially in combination with more substantial first time home buyer opportunities like those detailed in a previous post of mine).
The critical task will be to make sure that the beneficiaries don’t look at this as a windfall and simply use it to spend above their means without recognizing that it will need to be paid back. What I hope is that asset development practitioners and community-oriented financial professionals can help first-time home buyers set up appropriate savings or investment vehicles that allow them to put the money away, earn investment/interest returns, and have sufficient funds available in future years to make the required repayments.
No-interest loans will surely help grow the pool of capital available for asset-building strategies, ranging from home repairs and maintenance to small business development to retirement savings.
With some creative thinking, financial professionals (especially in the nonprofit asset development field) could play a huge role in helping new homebuyers maximize the value of this opportunity. We could design initiatives in which income-eligible new homebuyers receive an additional financial incentive for putting their refundable credit into a restricted investment vehicle like an IRA or a 529 college savings plan or an IDA-like custodial account. That might only impact a select number of beneficiaries directly, but it could build awareness within the broader population of new homeowners about how to responsibly invest the refundable tax credit. I could imagine some financial institutions being excited to partner on such initiatives.
Does this temporary legislation allow enough time for the field to respond in creative ways? We’ll see.