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Tax Incentives and Low Interest Rates are Helping...Right?

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By : Jamie Mathwig    99 or more times read
The federal government's tax incentives for home buyers, and monumentally low interest rates should be stimulating the real estate market; but are these band-aid solutions really stopping the bleeding?

It was thought that the $8,000 new home buyer tax credit would give the real estate market the shot in the arm it needed to pull out of its crisis; however, according to some critics, the plan may not be working as well as expected, with only a small portion of the available funds being tapped by home buyers. There are a couple of reasons for the lack of activity surrounding this stimulus plan.

The current economy has left many people in a situation where purchasing their first home is just not an option. Recent unemployment or lack of stable employment, combined with decreased savings has left people unable or unwilling to make such a large investment. The tax incentive also was offered to those who wanted to move up and out of their existing homes, but with a large percentage of homeowners faced with mortgages that are worth more than their property is worth, they too are not in a position to take advantage of the tax credit. Banks have also tightened up their lending guidelines making it difficult for even those with decent credit ratings to qualify for a mortgage.

For those who meet the criteria for the tax incentive and are also able to meet the banks demands, there is yet another hurdle. It seems time is working against the entire procedure as lending institutions are unable to keep up with the demand of mortgage applications and the surge of foreclosures they are having to process.

The original fall '09 deadline for the tax incentive has been extended twice to accommodate the demand; however, even with the extensions in place a large majority of deals will be lost due to the back log in the banks. The National Association of Realtors estimates up to 180,000 homebuyers will lose their tax credit simply because they could not get the deal closed before the deadline.

Currently in the US, interest rates are at the lowest they have been since the '50s. This move is supposed to encourage activity in the real estate market; however, much like the stimulus plan, this plan is also seeing little success. Uncertainty in the economy and a mindset that house prices will continue to fall as more foreclosures hit the market are thought to be reasons why people are not taking advantage of the low rates.

Fundamentally, one would think that big dollar incentives and outrageously low interest rates would have realtors in a feeding frenzy; sadly this is far from the truth. The Mortgage Bankers Association has reported that demand for loans to purchase a home have sank to a 13 year low and there seems to be no signs of a turnaround in the near future.

So, are the 100's of billions being spent on stimulus packages and the lowering of interest rates shaping up to be akin to the old adage of 'closing the barn door after the horses have gotten out'. There are many problems with the economy that need to be addressed before consumers will have the confidence to enter into the housing market and as well intentioned as the various plans may be, the wounds need to be treated with more than just a band-aid.
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