Friends, I believe we are standing atop the second hill of a rollercoaster.  I know another dip is coming, though I am not sure when.  I think it might be a steep drop, but I am not sure how steep.

The KCM Blog frequently explains why the market has another bottom to reach (shadow inventory, bank-owned properties, interest rate fears, and such).  Today, I want to send out my plea to cyberspace for government preventive action rather than reactive action (after the decline resumes).

There are Three Primary Reasons for the government to reinstitute the tax credit:

1. Though the government gives $8000, it doesn’t cost them $8000.

It costs them about $3000.  Why?  Because the government is going to collect income taxes from all the people who receive income directly from the transaction.  On a typical $200,000 purchase, typical revenues approximate to be:

1. Real Estate Commission (5%) – $10,000
2. Mortgage Company Compensation including fees (3.5%) – $7,000
3. Homeowners Insurance Premiums, Appraisal Fees, Credit Reports, Settlement Company Fees, Home Inspections, Termites Reports, Etc. – $3,500
4. Non-HUD-1 Expenses (Attorneys, Moving Companies, Etc.) – $2,500
5. Say 1 in 6 Buyers spend $12,000 in home improvements, the average is $2,000

Most of these costs wind up contributing to payroll, either at the point of expense (like commissions) or being spent in overhead (like copy machines) who, in turn, hire employees.  If 80% of these expenses become payroll, and the average tax rate is 25%, the government is collecting $5,000 in increased tax revenue for each $8,000 expense.

2. Buyers Buy Stuff!

Especially when they have an $8000 refund on the way!  The economy is further buoyed by all the furniture, electronics, and knick knacks people buy when they close on a home.  That’s Sales Tax Income.  But, more importantly, it’s JOBS.  Jobs to manufacture stuff.  Jobs to sell stuff.  Rent that gets paid to support commercial landlords and real estate values.

3. What will be the cost of increased unemployment if we don’t?

Potentially hundreds of thousands of people could be applying for unemployment, if the real estate and mortgage industries contract because there are not enough deals being put together.  I don’t know the exact number of cost per person on unemployment, but I’ve got to believe it’s more than the $3000 the government is “losing” on a tax credit deal.

While I have never really supported government artificially supporting an industry, I have always been a proponent of tax credits because I believe money in the hands of the people will be spent more efficiently than money in the hands of the government.  It’s truly a “win” for liberals and conservatives, but more importantly, it’s a win for our economy and the American people.

Now, I believe we need to reinvigorate home buyers (we have already seen the drop off of activity at Open Houses).  Money is a good motivator.  Couple a newly packaged Tax Credit with today’s historically low interest rates, and you have a formula to possibly prevent the double dip (or at least have a more graceful decline).