Talk of the Homebuyer Credit: It’s Baaaack

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.