The Homebuyers Credit: Is It Better to Laugh or Cry?

By :: June 24th, 2010

For two years, the homebuyer credit has been in the running for Washington’s worst tax policy idea. Now, new evidence about this bit of legislative bilge suggests it may be time to retire the trophy.

The Commerce Department reports the new homes market collapsed in May after booming in March and April (chart). Why? Well, in early spring, in response to an intense marketing campaign by the real estate and mortgage industries, tens of thousands of buyers accelerated home purchases to take advantage of this sweet tax give-away (as much as $8,000 for some buyers) before the credit expired on April 30. Then, just as most sentient economists predicted, the market dried up. Actually, it didn’t just dry up. It became the Death Valley of housing.

New Home Sales chart

Monthly new home sales (which are seasonally adjusted) had been running about 350,000 in early 2010. As buzz about the credit heated up, purchases spiked to about 390,000 in March and to 450,000 in April. Then, the credit disappeared and so did the buyers. Sales in Mayplunged to 300,000, the lowest level in four decades.

As the chart shows, this was--entirely unsurprisingly--exactly the same pattern we saw when the credit was first scheduled to expire at the end of 2009: A big run up in sales in October and November followed by a sharp decline thereafter. 

Total amount of permanent job creation from this timing change: pretty close to zero. Cost to taxpayers: $12.6 billion just through last February—even before the latest buying frenzy. What a deal!

As my Tax Policy Center colleague Ted Gayer has been warning, at least 85 percent of those buyers would likely have purchased a home anyway. For them, the credit was a pure gift--courtesy of a government running a $1.4 trillion deficit.

But that’s not all. Yesterday, the Treasury Department’s inspector general issued its second report on homebuyer credit fraud. And the scams are worthy of a Carl Hiasson novel. Among the lowlights: 1,295 prisoners received $9.1 million in credits for houses they claimed to buy while incarcerated. Two hundred forty-one were serving life sentences at the time. Hiasson—the bard of two-bit Florida hustlers-- will be pleased to learn that almost two-thirds of these frauds occurred in his home state, where ripping off federal taxpayers appears to be about as common as shuffleboard.

And it wasn’t just cons running the hustle. Sixty-seven different people claimed the tax break for one house. More than 2,500 got almost $18 million for homes they bought before the credit was effective. In all, the IG unearthed 14,132 people who received erroneous credits of $17.6 million.

The hardest bit to swallow is not so much that the homebuyer tax credit is a boondoggle. It is that it was a totally predictable waste of money. Economists warned Congress in 2008 that the credit would do little more than shift timing decisions by a few months. But lawmakers ignored the advice again and again. Remarkably, the Senate may be about to give buyers still more time to close on homes they put contracts on before April 30. That way, they can squeeze the last few dollars out of a failed credit.    

15Comments

  1. Anonymous  ::  9:37 pm on June 24th, 2010:

    If it was the worst idea ever, why did you give it a “C”?

  2. Anonymous  ::  4:53 am on June 25th, 2010:

    I recall reading that the benefits of this tax credit flowed almost entirely to sellers, and that prices dropped by the amount of the credit when it expired. Just like Cash for Clunkers. True?

  3. Anonymous  ::  2:40 pm on June 25th, 2010:

    It loosened the market. I wouldn't be able to move to my new job (and my wife's new job), if it weren't for the first time home buyer who is buying my house. He was motivated by the tax credit (but didn't find our house in time to take advantage of the credit).
    I have many colleagues (4 off the top of my head) who have been moving to new jobs (in the biotech/academic sector) who can't sell their old homes and now live with the incredible stress of two mortgages on top of moving and new job stress. Some have broken homelives (can't give up the second income in the old town, so spouses live in separate cities).
    I know others who would like to move but can't move because there are no buyers of their homes. Often if sellers find buyers, their buyers can't sell their homes. Our realtors deal with chains of closing where any one failure to find a buyer collapses all the sales. As many as 5 sales depend on finding a buyer at the end of the chain. Very very tough. The only way to break these chains is to bring in buyers who don't need to sell a house first: first time home buyers. And getting first time home buyers interested in a market that is falling off a cliff is hard. Hence the tax credit.
    This is really about allowing employment mobility. Its NOT about house prices. The program is incredibly important. We are facing not a recession but a complete change in our economy. A huge employment dislocation. All those construction workers in boom areas building houses that will never have owners need to move away from those areas and find new employment. Employment in industrial production if we are likely. Employment in new energy system construction.
    Looking at this program as a home sales program is, frankly, foolish and short sighted. I expect better analysis from Brookings.

  4. Anonymous  ::  5:20 pm on June 25th, 2010:

    If $8,000 provides such a significant incentive to buying a house, why don't the various real estate agencies and home builders touting the benefits of the credit just offer the $8,000 themselves? The perceived public benefit would still remain, however the costs of the credit would be internalized.
    Regarding the IG report – prisoners claiming the credit is not illegal last time I checked. They also could have filed joint returns with their spouse, where the spouse received the $8k. Additionally, you would find a lot of the same addresses claiming the credit at say, a condominium complex that sold a bunch of units in the last few years.

  5. Anonymous  ::  6:09 pm on June 25th, 2010:

    Thanks for making the issue real.

  6. Anonymous  ::  6:17 pm on June 25th, 2010:

    It is past time to think of housing as an investment. The housing market is important because people need a place to live and would prefer to own it (eventually). Goosing the market when it is dead is sometimes necessary – however it will not and should not go back to boom levels – where people were not only using real estate for housing but for speculation. That never ends well and we should not expect to go back to that environment any time in the near future – or to the associated price levels. This is why the most necessary aid to housing is not a down payment credit, but the new program to allow underwater homeowners who bought at the top of the market to have their principal balances ratched down. This would allow some of these folks to become sellers again and to take advantage of other home buyer programs to move into something a little better (which then allows other people to move up) and meet their housing needs.

  7. Anonymous  ::  3:15 pm on June 26th, 2010:

    The middle class is unfortunately too willing to take a handout, accepting money that has been forcefully extracted from others. Tax credits are modern welfare. Good riddence homebuyer handout!

  8. Anonymous  ::  2:35 pm on June 29th, 2010:

    IMPORTANT UPDATE: Today the House of Reps. appear to be voting on a stand-alone bill proposing first-time buyer extension (close date). If passes, then on to Senate. It's getting down to the wire!
    Read Here…
    http://www.mlive.com/michigan-job-search/index.ssf/2010/06/house_to_vote_on_standalone_unemployment.html
    Also note that there is also a motion for a stand-alone bill for unemployment benefit extension as well…but again, they are now separate issues

  9. Anonymous  ::  8:25 pm on July 27th, 2010:

    The tax credit was a terrible idea. I am saying this and it helped my business a lot in the short term. However, I know it hurts our economic future so it will be bad in the end. Why can't politicians learn to look for the future instead of the now and what will get them elected. Check out my website for more mortgage information at http://www.BrianFerrick.com
    Thanks,
    Brian

  10. Anonymous  ::  10:00 pm on July 27th, 2010:

    The tax credit, good or bad idea, did exactly what it was supposed to do, it restored a bit of confidence in the real estate market that was in a vicious downward spiral.
    Crooks will always find a way to abuse anything, that doesn't make the program a failure.
    How much of the $8000 went back into the economy? The previous boom was financed almost entirely by consumer spending and confidence and may be the way out.

  11. Anonymous  ::  10:29 pm on August 28th, 2010:

    Cry, cry, cry. This program benefitted realtors for sure. But not homeowners. The market will continue to drop and these buyers will have purchased at below the low prices.
    If you have cash, wait on the sidelines. If you are getting a mortgage, you should buy in the next 6 months as I think we are close enough to the bottom

  12. Anonymous  ::  7:07 am on October 22nd, 2010:

    Besides extending the $8,000 tax credit for first time home buyers until April 2010, the Act also provides a $6,500 tax credit for current homeowners who purchase a home between November 6, 2009 and end of April 2010.Alta Vacation Homes

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