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D.C. Tax Credit Praised

Break Assists First-Time Buyers

By D'Vera Cohn
Washington Post Staff Writer
Friday, March 25, 2005; Page B01

The District's tax credit for first-time home buyers has been a significant force in jump-starting the city's real estate market and helping low- and moderate-income people buy their first homes, according to a study released yesterday by the Fannie Mae Foundation.

Thanks to the tax credit, a higher share of D.C. home buyers purchased a home for the first time than is true nationwide or in other central cities, the study said. But the most solidly minority neighborhoods and the lowest-income people were helped less than were mixed neighborhoods and moderate-income households, it found.

The study examined tax and home-purchase data for 1997 to 2001, the first five years that a federal income tax credit of up to $5,000 was available for first-time home purchases in the city. The credit, which remains in effect, is intended to bolster the city's population, help low- and moderate-income people build wealth and expand the number of homeowners, whose purchases give them a stake in improving the city.

"The tax credit substantially increased demand for owner-occupied housing, raised home values, stabilized low-income and minority neighborhoods, increased owner housing supply and reduced vacancy," it concluded.

The credit also had a "substantial impact" on home prices, according to the study, which said it accounted for about a third of the price increase during that period, when the city's reputation was rising because of improved financial health and a declining homicide count. The city's price appreciation during those years outstripped that in nearby Maryland and Virginia suburbs, it said. Low- and moderate-income neighborhoods were helped more than wealthier ones, it said.

But the tax credit has not helped solidly minority neighborhoods as much as mixed ones, it said, nor has it done as much for very low-income households. Only 1,052 households with incomes under $20,000 claimed the tax credit during those years.

Rising home prices, it noted, are a mixed blessing -- good for owners, but a barrier to those who want to become owners and have lower incomes. "Many renters and future home buyers are at risk of being priced out from the District market because of the substantial impact of the home-buyer credit program on overall housing market dynamics," it warned.

Michael Hodge, chief operating officer in the office of the deputy mayor for economic development, said the report's conclusions "overall are quite positive" and described the tax credit as a "very powerful tool" in combination with city programs that offer financing assistance. He said the report shows that the tax credit "hit the right population."

The study, by Zhong Yi Tong, said 21,821 households claimed the tax credit for 1997 to 2001. Hodge said he believes the figure has doubled since then, indicating that it still serves a need. He said that Mayor Anthony A. Williams (D) will seek to have the credit extended through the end of 2009; it now is scheduled to expire next year.

Two-thirds of D.C. home buyers during the first years that the credit was available had never owned a home, the study said. Most who claimed the credit were D.C. residents with low to moderate incomes, the study said. Five out of six had household incomes of less than $75,000, whereas about half of all households in the region have incomes higher than that.

The full tax credit is available to single people with incomes up to $70,000, and a partial credit is available for married couples with joint incomes up to $130,000.

The credit did not help increase the supply of new housing, though it may have spurred some conversion of rental units, the study said. The credit may also have contributed to an increase in rents, making it harder for longtime tenants to stay, it said.

The study also said the credit helped draw new residents to the city: 14 percent of claimants came from local suburbs, a rate that rose slightly during those years.

More than three-quarters of D.C. home purchasers during those years took advantage of it, including some who had owned homes elsewhere.

The study made the case that increased property tax revenue and homeowners' gains in equity more than compensated for the lost income-tax revenue.

It described the tax credit as a potential national model, "an effective instrument for reviving central cities and distressed neighborhoods," as well as for closing the persistent homeownership gap between low- and high-income groups, and between whites and minorities.

"Despite a lot of perceptions that people with low and moderate incomes can't buy [homes] . . . it actually shows that restructuring the tax playing field in a more level and equitable way can open the field to a lot more homeowners," said Jim Carr, the foundation's vice president for research.

© 2005 The Washington Post Company