The Homebuyer Credit as Economic Success Story

The news from Thursday’s Washington Post:

The Senate voted Wednesday to renew the government’s $8,000 tax credit for first-time home buyers through the first six months of next year as part of a broader bill designed to extend unemployment benefits.

For the first time, the tax credit program would also enable many homeowners who buy a new primary residence to receive a $6,500 refund.

The measure was attached to a bill that would provide 20 weeks of unemployment benefits in more than two dozen states with jobless rates above 8.5% and up to 14 weeks elsewhere. Another provision in the bill would allow businesses that had operating losses in 2008 and 2009 to seek refunds for taxes paid on profits over the past five years.

Why this legislation now? Because despite signs that the economy as a whole, as measured by GDP, is growing again, most American households are still feeling the pain of a very weak labor market, which economists expect will be unusually slow to recover this time around. Hence, the extension of unemployment benefits is easy to justify.

But what about the homebuyer tax credit–which in the original stimulus bill was set to expire on November 30? Policymakers can argue that the housing market has been slow to recover as well–in large part due to the continued weakness in the labor market. (Who feels like buying a new home when faced with so much job insecurity?) But many economists are skeptical about whether this tax credit really “works” to give households the new incentive to go out and buy homes. From the Post story:

Supporters of the tax credit, including the real estate industry, say it has energized home buyers and helped increase sales. But critics say the program is too expensive and has attracted mainly people who were going to buy a home anyway.

The Tax Policy Center’s Howard Gleckman recently blogged:

The early returns are coming in on the First-Time Homebuyer Tax Credit and it appears to be a bigger boondoggle than even I thought it would be.

At a House Ways & Means Oversight subcommittee hearing today, the Internal Revenue Service inspector general reported that the IRS is auditing more than 100,000 of the roughly 1.4 million returns that included a claim for the credit. This is a staggering audit rate for an agency that usually reviews only about 1% of returns.

And what the agency has found is jaw-dropping. Almost 74,000 buyers claimed the credit even though they probably owned a house over the past three years (the credit is only available to those who did not own during that period). One dead give-away: More than 12,000 of this bunch claimed the residential energy credit sometime during the past three years. Another 19,000 filed for the homebuyer credit even though they had not actually gotten around to buying a house, a fairly spectacular exhibition of chutzpah. And 580 credits were claimed on behalf of children, including at least one four-year-old—obviously a budding real estate developer…

Add to all of this the estimate by Ted Gayer at Brookings that more than 85% of the projected 2 million people expected to claim the credit would have bought a house anyway…

Then Howard notes how this makes the homebuyer tax credit similar to the Cash for Clunkers program: it borrows money to move forward purchases that for the most part would have occurred (just a little later) anyway.

That the tax cut or subsidy (a rebate in the Clunkers case) designed to promote a certain form of economic activity doesn’t actually encourage that activity makes many economists consider it “a waste”–a low economic “bang for the buck” policy. But economists perhaps have too high standards, and how high or low the “bang” is depends on how one defines the “bang.” Thinking more broadly and less “snootily” about what this policy is supposed to do, I realize that in the context of countercyclical “stimulus” intended to boost GDP during a downturn in the economy, there are many ways in which the homebuyer tax credit–like the Cash for Clunkers program–could still have a pretty big “bang” and “succeed” in a sense, even if it doesn’t actually encourage anyone to buy a home they wouldn’t have eventually bought anyway.

I see three possible effects of the tax credit on a household who claims it:

1. The household buys exactly the same house exactly when they would have bought it anyway, so that the tax credit is like “free money”–extra cash they receive without having to change their homebuying behavior at all.
2. The household buys the same kind of house they had been planning on buying later in the year, sooner. The cash offer gets them to change the timing of their homebuying behavior.
3. The household buys a house when they weren’t even planning on buying a house, or they buy a bigger house than they were planning on buying. The tax credit actually gets them to increase their quantity of housing demanded, more fundamentally affecting their homebuying behavior.

Case #3 is the only one that economists might label a “success” from a microeconomic, allocation of resources perspective; it’s the only case that in the longer run increases the quantity of housing consumed in the economy. But all three cases could be quite successful from a macroeconomic stimulus perspective–that is, in quickly (even if just temporarily) boosting aggregate demand for goods and services.

Think GDP = C + I + G + (X-M) as I did in this post from earlier this year when the “recovery and reinvestment” act passed, and recognize that even under case #1 where the tax credit is just a windfall of cash to the household, that such windfalls are often a reliable stimulus strategy as long as households spend most of those windfalls–even if not on a house, but on other things. And in case #2, that is exactly what distinguishes shorter-term policies to “stimulate” the economy from longer-term policies to encourage economic growth; in the former case, we’re merely moving forward or “smoothing” the economic activity, not permanently increasing it. (That’s what explains and justifies the government’s deficit financing of the stimulus spending, too.)

From a stimulus perspective, it just boils down to who is getting the cash from the tax credit and will they spend most of the extra cash quickly? Just like Cash for Clunkers didn’t necessarily permanently increase demand for automobiles but probably encouraged some car buyers to speed up their purchases and gave other car buyers extra cash to spend on other things like groceries, the homebuyer tax credit might just be another mechanism to direct cash into the economy in such a way that it gets quickly and effectively spent and translated into higher GDP.

So (snooty?) economists may choose to label the homebuyer tax credit a “waste” if it doesn’t fundamentally change homebuying behavior, and I am certainly not apologizing for the poor quality of this policy as “housing” or “homeownership” policy. But on the other hand in the context of macroeconomic stimulus, it is at least one way to direct “assistance” to a certain kind of household–young households buying first homes or (in this new version) just moving to a next home. Perhaps we can think of it as steering the aid to growing families, which might partially offset the bias that the federal government tends to show toward seniors? It’s like how I recognized that Cash for Clunkers might not create permanently higher demand for Detroit’s autos (or permanently sustain Detroit’s auto industry), yet I was still happy to reward those Americans who were at least temporarily (even if unintentionally) helping Detroit out.

Comments

[lower98th:]

Or 4. The tax credit changes the rate of decline, or increases, the price of the house resulting in higher prices for buyerswhich are not fully offset by the credit - primarily benefiting the seller/lender/banks.

Nov 05 11:44 AM

[MyrEnforker:]

The housing credit goes to the buyer, but the artificial demand created by the credit props up housing prices, which ultimately benefits the sellers. The buyer may have been able to buy that house at a much cheaper cost had the credit not been in place, hence a wash for buyer and a boon to the seller.

The next question is "Who are the sellers?" Considering that in places like California where foreclosure sales are through the roof, banks are huge sellers in the current climate.

Can anybody count the number of ways that the government are bailing out the banks? Direct loans (TARP), MBS purchases by the Fed, AIG bailout, Homebuyer credit, and now Homebuyer Credit v.2.

Who wants to bet that there's more to come, since the banks half own the government using the money they've made over the past 30 years? You know what they say... Money talks.

Nov 05 12:01 PM

[Tom Armistead:]

Those who can qualify for a mortgage are the middle class, who have taken a hosing as the USG has spent billions bailing out TBTF banks. So now they get a small recompense. They'll pay it back in taxes.

From an economic point of view the point is to reduce supply. This country had about 1 million excess single family homes for sale so if this mops up some of that supply it helps sustain the asset values which is what this is about.

Remember, the asset values underlie a huge, huge amount of MBS, which is part of the capital structures of banks and insurance companies. TARP was originally supposed to support MBS. This credit for new homebuyers actually acieves that goal and could very well prevent the double dip recession so many a fearful of.

Nov 05 12:52 PM

[Mr. Ed, Jr.:]

"Think GDP = C + I + G + (X-M) as I did in this post from earlier this year when the “recovery and reinvestment” act passed, and recognize that even under case #1 where the tax credit is just a windfall of cash to the household, that such windfalls are often a reliable stimulus strategy as long as households spend most of those windfalls–even if not on a house, but on other things"

Then why would it not be better to just give EVERY taxpayer an 8k tax credit or just 8k in cash ? Then, all could help stimulate the economy, rather than just a small % of citizens who want to buy a home. Why not make it 10k or 15k, for even more stimulation ?
Why not give every citizen a million dollars ? Then we can pay off our mortgages and credit cards and get back to the mall. If that sounds idiotic-- it is. But it is just taking the smaller version and expanding it.

Do you think renters find this amusing ? They have their tax dollars taken from them to prop up somebody else's home price-- so that the rental prices can stay elevated.

The government thieves took almost a trillion dollars of our money and handed it over to incompetent and dishonest bankers-- the very ones who helped wreck the economy. Then they took another trillion and told us they would spend it to stimulate the economy. Instead, they handed it out to political cronies and used it to reward those who supported their campaigns. Now they want to steal more, but this time the money props up housing to protect the banksters. Again.

Not only is this a GDP mirage, it is an outrageous use of tax dollars. I do not know exactly where we went off the tracks as a nation, but we surely have.

Nov 06 04:00 AM

[Michael J. ...:]

Cash for Clunkers benefitted foreign automakers much more than Detroit. Moreover, it was a gimmick to boost third quarter GDP to create the bogus impression that the economy is on the rode to recovery.

The Obama Administration made a political decision, not an economically sound one, to artificially stimulate short-term demand. GDP that is based on smoke and mirrors such as home and car buyer credits distort economically reality and are cynical attempts by the government to intervene in the economy.

With unemployment nearing 10%, these government programs will have no positive long-term effect and may actually result in a larger decline in future GDP than would otherwise be the case.

Nov 06 04:51 AM

[MikeD71:]

This "program" is a disaster. Just like clunkers, and everything else Washington touches. We are prolonging the inevitable. Stand back and let the chips fall where they may. Just like we should have done from the start. It's gonna hurt, a lot, but it's the ONLY WAY.

Nov 06 08:06 AM

[a fat panda:]

"Why this legislation now? Because despite signs that the economy as a whole, as measured by GDP, is growing again, most American households are still feeling the pain of a very weak labor market, which economists expect will be unusually slow to recover this time around. Hence, the extension of unemployment benefits is easy to justify."

I am not sure what signs you are talking about. The ones that I see where I live say "reduced", "going out of business", "inventory reduction", "bank owned". If you are talking about GDP growth, it was 3.5%. According to Barrons over 90% of that growth was attributed to government intervention in the form of C4C, tax-credits, and the like. While it is a sign of something, I don't sense that it is a sign of economic growth.

Nov 06 11:38 AM

[a fat panda:]

"3. The household buys a house when they weren’t even planning on buying a house, or they buy a bigger house than they were planning on buying. The tax credit actually gets them to increase their quantity of housing demanded, more fundamentally affecting their homebuying behavior."

Here is a 4th possibility. The household leverages the tax credit and buys more house than they can afford. Once the tax credit is removed, and the house assumes its market valuation, the mortgage is underwater and the people who bought it are in bankrupcty and foreclosure.

And this is the case that you say economists call a success. I would love to know on what planet they live.

Nov 06 11:40 AM

[Smalltownba...:]

One other scenario based on actual observation of what is happening instead of pure speculation is that the credit encourages those who were thinking of buying to go ahead and make a purchase despite the current employment situation. That buyer purchases their first home. They file an amended return, receive their $8,000 then go shopping to furnish the new home spending that stimulus money on furnishings, landscaping and improvements.

As a result of their purchase the seller now makes a move up purchase of a new home helping to reduce the excess inventory and opening up the next pricing level of the market which has suffered most severely. This cycle continues until the market actually begins to improve accross the board. Some of the sellers will move down in housing but this does not hinder the equation because activity still exists and as long as it keeps going we have momentum.

This is why I consider the FTHB tax credit to be the best use of stimulus funds I have seen to date. It not only provides direct stimulus to sales, it doesn't artifically inflate pricing because it is a rebate and is not received up front. It has a low administration cost and with proper administration fraud can easily be kept to a minimum. Before granting the credit you simply review the last 3 years of tax returns, a settelment statement on the home purchased and process the credit on that basis.

Nov 06 11:45 AM

[fwi:]

Before the author gets too excited about these supposed stimulative effects, I would like to see the net numbers. That is, how many of these $150,000 households who bought a house in an economy with 10% stated (much higher real)unemployment economy. It is only a matter of time before the defaults begin. Houses require constant"feeding" beyond making the mortgage payment, and households making this kind of money generally have very low savings rate that could absorb that leaking roof or furnace repairs.
Trying to engineer house prices in this way is only sticking their finger in the dyke. Price , like water, will eventually find its level.

Nov 06 12:15 PM

[Socialism c...:]

Wrong way to do it. Across the board tax CUTS are the way to foster job creation AND enable those who are down from 2 to 1 income to keep more of their own money and potentially their home, as a result. They also allow more new buyers to be able to afford stepping in. Tax credits to buyers are simply redistributionist THEFT and still more artificial tampering with home pricing...which has GOT to end before we see the real bottom.


On Nov 05 12:52 PM Tom Armistead wrote:

> Those who can qualify for a mortgage are the middle class, who have
> taken a hosing as the USG has spent billions bailing out TBTF banks.
> So now they get a small recompense. They'll pay it back in taxes.
>
>
> From an economic point of view the point is to reduce supply. This
> country had about 1 million excess single family homes for sale so
> if this mops up some of that supply it helps sustain the asset values
> which is what this is about.
>
> Remember, the asset values underlie a huge, huge amount of MBS, which
> is part of the capital structures of banks and insurance companies.
> TARP was originally supposed to support MBS. This credit for new
> homebuyers actually acieves that goal and could very well prevent
> the double dip recession so many a fearful of.

Nov 06 03:14 PM

[Socialism c...:]

Because that would be a tax *cut*, not a redistributive *credit*, and there's both an accession to the Republican supply-side theory involved in that, as well as an acknowledgement that socialism is wrong and does not work. The Dems will not allow either....


On Nov 06 04:00 AM Mr. Ed, Jr. wrote:

> Then why would it not be better to just give EVERY taxpayer an 8k
> tax credit or just 8k in cash ? Then, all could help stimulate the
> economy, rather than just a small % of citizens who want to buy a
> home.

Nov 06 03:17 PM

[a fat panda:]

"As a result of their purchase the seller now makes a move up purchase of a new home helping to reduce the excess inventory and opening up the next pricing level of the market which has suffered most severely. "

If the mortgage on the sold home is in foreclosure. It opens nothing. If the house is at or near the mortgage, you open nothing as people move down market not up.

It doesn't reduce inventory. Actually you push demand forward getting people to buy houses in 2009 that they would have bought in 2010. So wait til you get to 2010 and you find that housing demand has fallen. Please don't be surprised. And don't be surprised if builders misread the suppressed inventory and start to build more homes. Then you are in a fix.

This tax credit business is exactly why few people count on the government to do anything right.


On Nov 06 11:45 AM Smalltownbanker wrote:

> One other scenario based on actual observation of what is happening
> instead of pure speculation is that the credit encourages those who
> were thinking of buying to go ahead and make a purchase despite the
> current employment situation. That buyer purchases their first home.
> They file an amended return, receive their $8,000 then go shopping
> to furnish the new home spending that stimulus money on furnishings,
> landscaping and improvements.
>
> As a result of their purchase the seller now makes a move up purchase
> of a new home helping to reduce the excess inventory and opening
> up the next pricing level of the market which has suffered most severely.
> This cycle continues until the market actually begins to improve
> accross the board. Some of the sellers will move down in housing
> but this does not hinder the equation because activity still exists
> and as long as it keeps going we have momentum.
>
> This is why I consider the FTHB tax credit to be the best use of
> stimulus funds I have seen to date. It not only provides direct stimulus
> to sales, it doesn't artifically inflate pricing because it is a
> rebate and is not received up front. It has a low administration
> cost and with proper administration fraud can easily be kept to a
> minimum. Before granting the credit you simply review the last 3
> years of tax returns, a settelment statement on the home purchased
> and process the credit on that basis.

Nov 06 04:08 PM

[Smrt1:]

While I agree with much of your analysis, 1 quick point- "...so that the rental prices can stay elevated." An influx of buying activity in the housing market actually lowers the quantity demanded of apartment and other multi-family rental dwellings (because former renters are now owners) and as such those who are still renting often see nice drops in rental rates. My rental rates dropped 15% from 2008-2009 before I myself became a 1st time homeowner. I am under no delusions that this is a wealth transfer but momma didnt raise no fool, so I will be getting a nice $ 8k credit on this years taxes.


On Nov 06 04:00 AM Mr. Ed, Jr. wrote:

> "Think GDP = C + I + G + (X-M) as I did in this post from earlier
> this year when the “recovery and reinvestment” act passed, and recognize
> that even under case #1 where the tax credit is just a windfall of
> cash to the household, that such windfalls are often a reliable stimulus
> strategy as long as households spend most of those windfalls–even
> if not on a house, but on other things"
>
> Then why would it not be better to just give EVERY taxpayer an 8k
> tax credit or just 8k in cash ? Then, all could help stimulate the
> economy, rather than just a small % of citizens who want to buy a
> home. Why not make it 10k or 15k, for even more stimulation ?
> Why not give every citizen a million dollars ? Then we can pay off
> our mortgages and credit cards and get back to the mall. If that
> sounds idiotic-- it is. But it is just taking the smaller version
> and expanding it.
>
> Do you think renters find this amusing ? They have their tax dollars
> taken from them to prop up somebody else's home price-- so that the
> rental prices can stay elevated.
>
> The government thieves took almost a trillion dollars of our money
> and handed it over to incompetent and dishonest bankers-- the very
> ones who helped wreck the economy. Then they took another trillion
> and told us they would spend it to stimulate the economy. Instead,
> they handed it out to political cronies and used it to reward those
> who supported their campaigns. Now they want to steal more, but this
> time the money props up housing to protect the banksters. Again.
>
>
> Not only is this a GDP mirage, it is an outrageous use of tax dollars.
> I do not know exactly where we went off the tracks as a nation, but
> we surely have.

Nov 06 05:12 PM

[K Smith:]

"...it just boils down to who is getting the
cash from the tax credit and will they
spend most of the extra cash quickly?"

What it really boils down to is not who is getting the cash, but where the cash is coming from.

There is no such thing as free lunch. You cannot create cash out of thin air without consequences.

We are all in for a big worldwide gobslap. And when it hits it will hit hard. All this talk of economic success a distraction.

Nov 06 09:58 PM

[Mark Alexander:]

The tax credit is clearly a success story for realtors and those who want to sell their houses and downsize over the next six months. It is basically a transfer payment from the rest of society to these groups. Otherwise, it will probably do more harm than good.

It will inflate home prices temporarily, but will deflate prices after the credits are removed partly as a result of pure economic costs, and partly because of a demand vacuum.

The credit also increases the risk of increased costs to bail out the FHA, which wil finance a large percentage of the new purchases at artificially inflated prices.

Nov 06 10:49 PM

[Ponchovilla:]

Use $8K check from the gov as an example. Good deal for the buyer because the NPV (net present value ) of $8K in 2-3 months at .1% savings rate is nearly $8K. Even if the price of the home is pumped up by $10K amortized over 30 yrs (or less) the NPV argument is valid. Who looses. Future generations because of the incremental added debt burden spelled future tax increases. Real estate agents will find harder times after the credit expires because of the pull forward effect of the sale....unless you/they really believe the stimulus is a stimulus.

Who goes crazy? Fiscal conservatives who cringe at the fact the government continues the folly of wasting money. We'll not wasting money but getting 20c worth on the dollar. Oh, that's a waste of money.

Nov 07 04:16 AM

[Commercial ...:]

Homebuyers Credit a Success? Nonsense

There are many problems with this tax credit but I’ll just quickly address one in particular.

None of the calculations being used to show the programs success take into account the source of the money. <i>The Government is borrowing money it doesn’t have to fund this give away.</i>

There is an economic and a fiscal cost to massive deficit spending. I don’t see that cost addressed in this analysis.

As far as I know no economist has come up with a satisfactory justification for robbing Peter to pay Paul. Peter may feel the plan was a success but Paul suffered an equal and opposite negative effect. At best the exercise is a wash. At worse we made things worse by taking Paul’s money when he might have had a more productive use of the cash in-mind. In any event Paul will be attending the next “Tea Party” protest in his town.

Nov 07 04:42 AM

[ryanclarke:]

Don't forget the realty agents, who make a commission based on the dollar amount of the house sold. You are correct when you say the banks own most of America, and the realtors are there goons. But don't worry and here is why: What good is money when say there is one million dollars in existence and one million people AND 999,999 people have not one penny and one person has a net worth of $1 million?

The use of money has no purpose in this case which is why the banks will soon find there assests to be worthless.


On Nov 05 12:01 PM MyrEnforker wrote:

> The housing credit goes to the buyer, but the artificial demand created
> by the credit props up housing prices, which ultimately benefits
> the sellers. The buyer may have been able to buy that house at a
> much cheaper cost had the credit not been in place, hence a wash
> for buyer and a boon to the seller.
>
> The next question is "Who are the sellers?" Considering that in places
> like California where foreclosure sales are through the roof, banks
> are huge sellers in the current climate.
>
> Can anybody count the number of ways that the government are bailing
> out the banks? Direct loans (TARP), MBS purchases by the Fed, AIG
> bailout, Homebuyer credit, and now Homebuyer Credit v.2.
>
> Who wants to bet that there's more to come, since the banks half
> own the government using the money they've made over the past 30
> years? You know what they say... Money talks.

Nov 07 01:17 PM

[bricki:]

That is a pretty nonsensical scenario given that lenders are requiring 20% down these days. That would mean that $8,000 > 20% of the price of the house, or that the house price was less than $40,000.

Really I think that the only scenario that makes sense is that it brings some home sales forward in time because it effectively allows buyers to accumulate lower amounts of savings before they can purchase a home.

I really don't think that helps anyone much. What is really needed is a way to bring job creation forward in time.

On Nov 06 11:40 AM a fat panda wrote:

> "3. The household buys a house when they weren’t even planning on
> buying a house, or they buy a bigger house than they were planning
> on buying. The tax credit actually gets them to increase their quantity
> of housing demanded, more fundamentally affecting their homebuying
> behavior."
>
> Here is a 4th possibility. The household leverages the tax credit
> and buys more house than they can afford. Once the tax credit is
> removed, and the house assumes its market valuation, the mortgage
> is underwater and the people who bought it are in bankrupcty and
> foreclosure.
>
> And this is the case that you say economists call a success. I would
> love to know on what planet they live.

Nov 08 01:45 PM