Talk of the Homebuyer Credit: It’s Baaaack

By :: September 2nd, 2010

Please tell me it isn’t true: Washington is buzzing with talk of Homebuyer Tax Credit III.  Like the killers in those really bad slasher movies, this tax subsidy wreaks havoc wherever it goes, appears to meet its demise in the last reel, yet returns to create more misery. 

The latest round started on Sunday, when HUD Secretary Shaun Donovan said it was "too early to say" whether the White House would support another round of credits.  Donovan and the Obama Administration have been backtracking ever since. But the damage is done.

Members of Congress and congressional hopefuls have leapt on the bandwagon. There is even a facebook page called “Extend the $8000 Federal Tax Credit until 2011 for 1st Time Homebuyers.”

Congress has run the homebuyer credit experiment twice in the past two years. And the dismal results were exactly what economists predicted: In the months before the credit expired, buyers scrambled to get a deal from Uncle Sam. The frenzy boosted demand and drove up prices. Until the day the credit expired. Then demand collapsed and so did those prices.

We know what’s happened to home sales since the credit ended on April 30—they plunged to their lowest levels in four decades. While we don’t have good price data yet, there is growing anecdotal evidence that in some markets, house prices fell by more than the value of the $8,000 credit. Thus, buyers would have been better off waiting until it expired. Of course those sellers who rushed to take advantage by putting their homes on the market got hammered if they couldn’t find a buyer in time. Such is the madness caused by an on-again-off -again tax subsidy.   

As Steve Cook, author of the blog realestateeconomywatch.com, notes, even talk of a credit has perverse effects on the housing market. That's perhaps one reason why Cook says the real estate industry is divided over whether to bring it back. The problem: The Siren song of a new tax deal on the way may well drive potential buyers back to the sidelines while they await its return. Thus, administration-fueled rumors of a new credit could further slow sales in the coming months, the last thing either real estate agents or Democrats need right now.

The ever-popular solution to this problem is to make the credit retroactive so that those who bought after the expiration of Homebuyer Credit II will get the tax break. It is only fair, supporters of this terrible idea say. But such a step is a pure windfall for those who have already bought, and while it surely will increase the national debt it will do absolutely nothing to encourage new sales or new jobs.

The other day a reporter asked if, for all its flaws, the credit was better than nothing. No, it isn’t. 

There may be good ways to reduce the supply of unsold houses, which after all is the real problem. But those solutions lie far beyond the realm of tax policy, which aims to boost demand by heavily subsidizing home ownership.  

8Comments

  1. Anonymous  ::  7:41 pm on September 2nd, 2010:

    Bringing this credit back is not supposed to help buyers. It really helps realtors, who need the commission income, local governments who need the tax and fee income and holders of foreclosed properties, who have massive inventory that still needs to be moved.
    The best actions to take to get beyond the housing crisis would be to 1. restore cramdown authority to bankruptcy courts so that one need not foreclose to get out of an underwater mortgage, and 2. mark mortgage backed securities to market and require lenders to adjust the underlying mortgages to these levels as well (or, the mass cramdown), or 3.have the Fed and the GSEs mark their mortgage backed securities to market and use their leverage to have servicers reduce principal balances. Probably one or two are most feasible. 1 is most necessary. Indeed, the untold story of the housing bubble is that if bankruptcy reform had not repealed cramdown authority, no investment model could have ignored the likelihood that mortgage backed securities can lose money. Putting this authority back into law is the first step to having security holders take the haircut they so desperately deserve for precipitating this crisis, while letting borrowers declare bankruptcy where needed so that they have a reasonable debt level. In such a scenario, deflation is not a dirty word. Deflation is only a bad thing when people have no recourse but abandoning property in order to escape unpayable debt.

  2. Anonymous  ::  1:28 am on September 3rd, 2010:

    Correct. This credit, like cash for clunkers, is intended to flow to sellers and will do exactly that. Buyers will get almost none of the benefit.
    Cash for clunkers increased the price of used cars dramatically. So all we need to do is require that buyers under this program trade in an old energy-inefficient house which the government will then demolish. THAT will prop up housing prices durably. It will also be even more wasteful and just plain stupid than cash for clunkers.

  3. Anonymous  ::  7:56 am on September 6th, 2010:

    I'm a realtor in NJ and with the tax credit up to $8,000, an abundant inventory of great homes to choose from, prices down by 10-20% from their highs of a few years ago, and record low mortgage interest rates, buyers who can afford a home should definitely take advantage of this market.

  4. Anonymous  ::  5:15 pm on September 7th, 2010:

    Actually, the value of my used car just went up – so when I do decide to get a new car I might be able to get more at trade in or more by selling it privately.

  5. Anonymous  ::  10:35 pm on September 7th, 2010:

    “idea that failed twice and left us with the worst housing market in four decades.”
    F-ing Republicans can't even admit their own mistakes. The housing crisis was caused by eight years of Republicans and “self-regulating” and “the market policing itself.” “Republican ideals” are what brought this country down, not the home buyers tax credit.

  6. Anonymous  ::  11:48 pm on September 7th, 2010:

    Thanks for taking this opportunity to discuss this, I feel fervently about this and I like learning about this subject. If possible, as you gain information, please update this blog with more information. I have found it really useful.

  7. Anonymous  ::  8:14 pm on September 10th, 2010:

    Steve. We need some govt incentive to help finish real estate projects started before the crash. I need to spur sales just to finish what was started in 2005. It's Murderous for those of us still hanging on and are saddled with development debt. How about low interest contraction loans for projects started before 2006 and some right down by banks to appraised value.

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