The True Cost of the Home Buyer Tax Credit

One of the more interesting numbers to come out of Wednesday’s economic news was the cost per marginal homeowner of the $8000 first time homebuyer tax credit. It’s a rather astounding $43,000. That’s what it costs to lure those that wouldn’t have bought into the market.

A couple of sites in the blogosphere talked about this but, as usual, no one did it better than Calculated Risk. From that fine blog here is how the numbers shake out:

With regards to the tax credit, what really matters is the cost per additional home sold. And as I pointed out earlier today, even using the NAR numbers, the cost per additional home sold is $43.4 thousand.

Here is the math: 1.9 million buyers qualify for the credit (the NAR estimates between 1.8 and 2.0 million) = $15.2 billion.

The NAR estimates the tax credit resulted in 350 thousand additional purchases. So divide $15.2 billion by 350 thousand = $43,000 per additional home. And the numbers will get worse if the program is extended.

This is not a trivial point as what’s at stake here is once again a government program that picks winners and then uses the fisc to subsidize those so chosen. The goal of jump starting a particularly important part of the economy may be laudable, but the results are less so. Realistically, an additional 350,000 home sales is little more than a rounding error when put up against the scale of the US economy, yet the cost of achieving this result is anything but. A $15.2 billion expenditure is meaningful even in terms of the bloated numbers we tend to toss around these days.

It’s, I suppose, hard to get too worked up about this given the generosity of the government towards the banks and others, but it still represents a disturbing trend. Stimulus of this sort might or might not result in greater multipliers, be more efficient or just generally preferred by economists but the social cost is high. Once again it brings me back to the idea that we would be much better off just reducing individual tax burdens and sending money directly to those who don’t pay taxes as opposed to the schemes we’ve adopted.

Whenever the choices of who will and will not benefit from government largesse is left to the politicians, a great deal of inequality and inefficiency seems to follow. The new homebuyer tax credit seems to be shaping up nicely in that mold.

Comments

[Mad Hedge F...:]

erthj. Don’t kid yourself into thinking that the real estate collapse is over. Yes, you can be forgiven for thinking so with July new home sales up 10%, the Case-Shiller home price index up two consecutive months, and homebuilder stocks like Toll Brothers (TOL), D.R. Horton (DHI), and Lennar (LEN) through the roof. Nationally, home prices have fallen back to their historic average of 3.2 times earnings. The problem with all of this is that crashes don’t end at the averages, they overshoot. Some cities like Los Angeles, New York, and Washington DC are still historically expensive. Take away the life support of ultra low interest rates, the $8,000 first time buyer tax credit, the $6,000 California tax credit, $1 trillion in Fed purchases of securitized debt, and toss in another five million expected new foreclosures, and that might give you your final bottom. But that isn’t happening this year. Rent, don’t buy.

Sep 02 12:55 PM

[JPDX:]

For a lot of people it's not only about money. They want to buy a house to have the opportunity to 'own' something they can actually change and make their own. Renting sucks for most folks even though financially it's always a better option despite what those online calculators tell you. For me, the freedom is worth more than years of possible appreciation. I suppose that in a normal market buying would be much safer, but that risk of a collapse like what we've seen is so not worth it! I'd say if you cannot pay cash, rent and save until you can.


On Sep 02 12:55 PM Mad Hedge Fund Trader wrote:

> erthj. Don’t kid yourself into thinking that the real estate collapse
> is over. Yes, you can be forgiven for thinking so with July new home
> sales up 10%, the Case-Shiller home price index up two consecutive
> months, and homebuilder stocks like Toll Brothers (seekingalpha.com/symbo...),
> D.R. Horton (seekingalpha.com/symbo...), and Lennar (seekingalpha.com/symbo...)
> through the roof. Nationally, home prices have fallen back to their
> historic average of 3.2 times earnings. The problem with all of this
> is that crashes don’t end at the averages, they overshoot. Some cities
> like Los Angeles, New York, and Washington DC are still historically
> expensive. Take away the life support of ultra low interest rates,
> the $8,000 first time buyer tax credit, the $6,000 California tax
> credit, $1 trillion in Fed purchases of securitized debt, and toss
> in another five million expected new foreclosures, and that might
> give you your final bottom. But that isn’t happening this year. Rent,
> don’t buy.

Sep 02 01:54 PM

[markfl:]

"With regards to the tax credit, what really matters is the cost per additional home sold. And as I pointed out earlier today, even using the NAR numbers, the cost per additional home sold is $43.4 thousand." Unfreaking believable. That's somebody's gross annual salary.

I'm not much for political dogma, but if you take the idea that someone who is employed but is struggling and at risk of foreclosure--the idea that he his paying taxes so that someone else can buy a home when he can barely afford his--it really starts to look like social engineering and vote buying. Save your own after tax dollars for your own down payment and buy your own damn house.

Sep 02 03:22 PM

[whidbey:]

This is hardly a shock. When you purchase respectability you pay the market price of opportunity costs to government services. The most expensive thing for government is to give money or things away, without be defrauded too often. The role of government is facilitate business transactions without financing or entering into the transactions as a party. Hard less to learn isn't it.??

Sep 02 03:39 PM

[Smrt1:]

Just to present a differing view and point of interest. I am of modest means and my wife and I both have secure jobs. I am one of those quoted in the article as being an additional purchoser of a home. I live in a state where much of my taxes are derived from property taxes. I probably would not have purchased my home without the tax credit. Not because I am without the means to purchase a home but merely because I enjoyed apartment living. It was very conceivable to my wife and I to stay in an apartment for the next 5 years easy. My additional tax burden as a result of buying this house for the next 5 years will be approx $ 20,000. Now if you account for my tax credit of $ 8k then that is $ 12 K in added taxes. Divide $ 12k by $ 8k and you get 1.5. The government is getting a 50% return from me on its investment of $ 8 k. I would love an investment with a virtually guaranteed 50% ROI. Who wouldn't?

Sep 02 04:29 PM

[Celcius:]

Has anyone considered the inflationary impact to housing prices with the $8,000 incentive? House prices should rise as the incentive artificially inflates demand; consequently, putting additional wealth into the pocket of the seller. Thus the incentive benefits the seller and burdens the tax payer. Once the incentive ends, housing demand should decline and cause a reduction in home prices. And potentially put these new home owners upside down in their home loans, since they purchased the property at an artificially inflated price.

It looks more like a bailout for speculators.

Sep 02 06:55 PM

[daniel3582:]

In theory, you are correct... however, there are not enough homes being sold to cause anything more than an statistically insignificant rise, especially considering that the credit is (in all reality) fairly small.


On Sep 02 06:55 PM Celcius wrote:

> Has anyone considered the inflationary impact to housing prices with
> the $8,000 incentive? House prices should rise as the incentive artificially
> inflates demand; consequently, putting additional wealth into the
> pocket of the seller. Thus the incentive benefits the seller and
> burdens the tax payer. Once the incentive ends, housing demand should
> decline and cause a reduction in home prices. And potentially put
> these new home owners upside down in their home loans, since they
> purchased the property at an artificially inflated price.
>
> It looks more like a bailout for speculators.

Sep 02 08:31 PM

[Mark54:]

This program is nothing short of a hard sales push on the first time home buyer. The root of the problem is that too many people owned homes that should have been renting. There is no math that will prove owning is more economical than renting.... owning a home is a luxury not a right. This is not a solution.

Sep 02 09:49 PM

[RatWatcher:]

Need to account for the fact your old landlord was paying taxes out of the rent you paid him, both on the property (to the city) and on the income (to the state and feds). Peeling the onion, YOU were already paying these taxes, they were just hidden from you.

Good luck in homeownership! Don't default and leave us out $8K for nothing......lol


On Sep 02 04:29 PM Smrt1 wrote:

> Just to present a differing view and point of interest. I am of modest
> means and my wife and I both have secure jobs. I am one of those
> quoted in the article as being an additional purchoser of a home.
> I live in a state where much of my taxes are derived from property
> taxes. I probably would not have purchased my home without the tax
> credit. Not because I am without the means to purchase a home but
> merely because I enjoyed apartment living. It was very conceivable
> to my wife and I to stay in an apartment for the next 5 years easy.
> My additional tax burden as a result of buying this house for the
> next 5 years will be approx $ 20,000. Now if you account for my tax
> credit of $ 8k then that is $ 12 K in added taxes. Divide $ 12k by
> $ 8k and you get 1.5. The government is getting a 50% return from
> me on its investment of $ 8 k. I would love an investment with a
> virtually guaranteed 50% ROI. Who wouldn't?

Sep 03 02:45 AM

[growser7:]

Smrt1. Your property taxes are new only to you; the previous owner of the house was paying them before you. There is no increase in the tax base. The house in fact cost the taxpayer $43,000.

Sep 03 07:59 AM

[MarkitWacha:]

This is a way to steal from the apartment complex owners, in the form of lower rents. So, this is skewing the playing field against those that risked time and treasure 5, 10 years ago to invest in a complex. Now, they'll have less, and the cities will see more apartment slums. My neighbor was laid off from her apartment complex where she worked. 1 less 'job saved'.

Government meddling is never benevolent. It can't be. Someone has to lose.

Sep 03 09:53 AM

[user8240:]

Someone wrote an article saying the additional cost of cash for clunkers was $50,000 per car; he subtracted the number of cars that presumably would have been sold anyway in determining the incremental cost per car. However, has no one noticed that the so-called math in this piece is nonsense. Multiplying the number of homes that could be sold by $8000 then dividing by the number actually sold does not make the cost per additional home buyer $50,000. If only one were sold would it have cost us $15.2 billion? Unless you know the number of homes that would have been sold without the program, you can't get to the "additional cost per buyer".
Anyway on a scale of 1 to TARP, the cash for clunkers and first time home buyer programs are only a 2. A few billion in stimulous going to people vs tens of billions so AIG can repay Goldman Sachs....whats the problem?

Sep 03 11:15 AM

[Left Coast ...:]

That is the worst, most deceptive math --you start with a wrong premise-- and you get the wrong conclusion-- that the cost of the program is the amount of people that could qualify and multiply it by the $8,000, as the program could cost $15.2 billion, therefore it does. Plus, if you really believe that those 350,000 homes wouldn't be sold unless there was a credit-- then you negliected to count in the payroll taxes, income taxes, sales taxes, fees paid on those homes to get the real cost to the government ($50k per house +/-). Did you consider the cumulative value protection the $2.8 billion cumulative credit used (real math 350k x $8k) will have on the states and municipalities by stabilizing those markets -- look at Case Shiller-- the markets have stabilized.

Sep 03 03:10 PM

[Smrt1:]

growser7: You are making the assumption that the taxes were being paid. They were not, the house was in a short sale situation with a special deal being hashed out between the bank, the local taxing authority and the seller. I am paying taxes that were not being paid before. I will grant you that my case is probably not typical but I can guarantee you that the "public" is getting more out of me than I got out of it from this deal.


On Sep 03 07:59 AM growser7 wrote:

> Smrt1. Your property taxes are new only to you; the previous owner
> of the house was paying them before you. There is no increase in
> the tax base. The house in fact cost the taxpayer $43,000.

Sep 03 04:18 PM

[Smrt1:]

If you are going to make that case you may need to remember that the Taxes that the landlord is paying to the city are deductible vs the taxes that he is paying on the income of my old rent. You missed my point as well, the $ 8k tax credit gave me an incentive to voluntarily increase my total tax burden. My home is 2000 sq feet and I pay approx 400 month in taxes on my property. My old apartment was 900 sq feet and cost $800 a month. Pretty sure the tax burden on my 1 lowly apartment was not 50% of what I was paying in rent.


On Sep 03 02:45 AM RatWatcher wrote:

> Need to account for the fact your old landlord was paying taxes out
> of the rent you paid him, both on the property (to the city) and
> on the income (to the state and feds). Peeling the onion, YOU were
> already paying these taxes, they were just hidden from you.
>
> Good luck in homeownership! Don't default and leave us out $8K for
> nothing......lol

Sep 03 04:24 PM

[Carlos Lam:]

On Sep 02 04:29 PM Smrt1 wrote:

> I live in a state where much of my taxes are derived from property
> taxes. I probably would not have purchased my home without the tax
> credit. Not because I am without the means to purchase a home but
> merely because I enjoyed apartment living. It was very conceivable
> to my wife and I to stay in an apartment for the next 5 years easy.
> My additional tax burden as a result of buying this house for the
> next 5 years will be approx $ 20,000. Now if you account for my tax
> credit of $ 8k then that is $ 12 K in added taxes. Divide $ 12k by
> $ 8k and you get 1.5. The government is getting a 50% return from
> me on its investment of $ 8 k. I would love an investment with a
> virtually guaranteed 50% ROI. Who wouldn't?

It's apples and oranges. Your property taxes go to your state or local government; the tax credit comes from the feds. This means that we taxpayers are essentially subsidizing your home AND the property taxes of your state. In exchange, we get nothing. Indeed, we get WORSE than nothing, since the federal government has to BORROW the money that it gives out as the $8K homeowner credit and apy interest thereon.

Sep 05 07:50 AM