Home Tax Credit a Costly Failure

[girl gone mad]

Home Tax Credit a Costly Failure
http://www.calculatedriskblog.com/2010/04/home-tax-credit-costly-failure.html">Calculated Risk

From David Kocieniewski at the NY Times: Home Tax Credit Called Successful, but Costly

Though the Treasury Department and the real estate industry have termed the program a success, helping 1.8 million people buy homes, many tax policy experts say it has been singularly cost-ineffective: most of the $12.6 billion in credits through end of February was collected by people who would have bought homes anyway or who in some cases were not even eligible.

There is no question this program was very costly. And why is the Treasury confusing activity with accomplishment? Sure sales briefly surged, but were new households formed? How many new jobs were created?

“We were happy in our apartment, but $8,000 was just too much to pass up,” said , 29, who shopped furiously with his wife for two months before signing a contract in March to buy a three-bedroom ranch.

“We bid on a couple places that didn’t work out,” he said, “but we always made sure we had a backup plan because we didn’t want to miss the deadline for the credit. And when we finally agreed to a contract, it was this huge relief.”

For every home buyer like the Greens, real estate agents say there are at least three others who collected the credit even though they would have bought without it. That means for each new buyer who was truly lured into the market by the credit, the federal government paid more than $30,000.

This is very optimistic - the ratio was probably 5-to-1 for the initial credit and even higher for the extension. But this shows two failures of the tax credit: 1) the high cost, and 2) it was just moving people from apartments to homes and didn't reduce the excess housing inventory (yes, rentals count as housing inventory too).

“The tax credit helped to stanch the price declines, which had substantial benefit for the entire economy,” said Mark Zandi at Moody’s Economy.com.

And this has been the policy - support asset prices by limiting the supply (all the foreclosure delays), and pushing demand (low mortgage rates and the tax credit). This has helped the banks significantly, and Zandi argues this has boosted confidence. Maybe ... but I'm not convinced that supporting house prices above the market clearing level to help the banks and boost consumer confidence makes sense. I think targeting jobs - and therefore household formation - would have been a far more cost effective program.

[dkf]

1. Personally I think it was a giveaway to the sellers not the buyers.

The buyers would have bought but would have paid less. The credit put an extra 8000 into an underwater house. So I guess you can say it was also shift to the banks.

[ejpoeta]

2. i think this person is missing the point. may not have been perfect but

the purpose, i believe, was to get the real estate markets moving again. i know we have a friend who was trying to buy a short sell in florida which the lender wouldn't get back to them on. had everything done was just waiting on the lender to approve. doesn't help when you have banks that don't want to move things along.

[geckosfeet]

3. Disagree. I know two families who bought homes and benefitted from the credit.

Both families hired people to make home improvements. They also purchased furnishings, appliances and home electronics for their new homes.

Costly? The savings and loan and mortgage backed securities failures were costly too - and the only people who benefited were a small group of bankers and investment people. I would rather help main street than the banksters.

I think the author is whining that the program helped people rather than investment banks.

Bastards.

[girl gone mad]

8. "I think the author is whining that the program helped people rather than investment banks."

You don't know Calculated Risk if that's what you think.

[geckosfeet]

9. Please, enlighten me.

My direct observations contradict the authors conclusions.

The banksters made out like bandits during the mortgage boom/bust cycle.

Now home buyers get a little back in the form of a tax break and put some of it back into the economy. How is this primarily benefiting the banks?

I do agree jobs are important, an clearly some of the tax break money is going into home improvements, appliance and furnishings. This helps stimulate economic growth and jobs.

[girl gone mad]

11. The tax credit hardly benefitted buyers.

It was a nice gift to the banks, and a huge misallocation of money. Now that the subsidy is gone, prices will revert to the prior trend line. I hate to think that many who could not really afford to purchase did so using the credit as a down payment (yes, this was happening). Some will end up in foreclosure, others will end up underwater as home prices continue to decline.

You should try reading the post, since the question of whether the money ended up helping the economy by trickling down to home improvement, appliance and furniture sales is directly addressed.

Calculated Risk is a very respected and popular financial blog and they were well ahead of the curve on the bubble and solvency crisis. I hold Bill's opinion on this subject in very high regard, because he is unquestionably an expert in this area. He hasn't been wrong yet, so there's no reason to believe he's wrong about this one. The program failed on every level.

[upi402]

12. Thanks for the blog tip ggm n/t

[geckosfeet]

13. Again, I disagree. It did help buyers. Not sure how the author can plausibly claim it did not.

Yes he goes on about how 75% of them would have bought anyway, but they got the tax credit. That helps them directly.

As I said - I personally know two families/people who bought who probably would/could not have without the credit.

The author DOES NOT, in any way that I could see, address home buyers using tax credits for home improvements and furnishings. It would be nice to see some numbers regarding how much of the tax credit money went right back into the economy. I would appreciate you providing a reference to what he says about that.

He seems focused on the 2008 origins of the program, and its subsequent mutations, and the fact that it helps buyers instead of people who own but are struggling.

While I certainly agree that people who own and need help should get it, that should not (for me anyway) rule out the use stimulus plans such as the tax credit.

Was it costly? Yes
Was there some fraud? Yes
Was there some additional downside? Yes

But the upside was well worth the effort in my mind.

Now, onto helping people stay in their homes and dealing with investment corp. fraud.

[mediaman007]

4. I think that it was important to get people shopping and looking.

Without the tax credit, the tendency would be to wait until times were better. The credit changed the attitude of the buyer.

It also perked up the attitudes of the real estate industry. Most of these people had not sold anything in 16 months or more.

[MichellesBFF]

5. Didn't reduce inventory?

Were you expecting homeless people to be buying homes? You gotta live somewhere, even if it is a rental.

[abelenkpe]

6. Programs like this are designed

to be a stop gap measure to keep people buying while other measures are put in place to support the economy. Yes, they pull demand forward temporarily. Many who were waiting choose to buy. Many who were going to buy already benefit as well. It's only a failure if you think the people who designed the program are so daft they don't realize it is a temporary fix. Libertarians would have you believe that. Libertarians also think Ayn Rand was a goddess of wisdom and all social programs should be scrapped. So clearly they aren't the pillars of logic one might assume.


Congress is targeting jobs (climate change bill) in the long term and using programs like this in the short term. But that can't happen with Republicans clogging up every effort made by congress to push forward.

[OllieLotte]

7. It was a temporary fix.

It helped keep home prices from falling further. When it ends, the downward pressure on prices will continue. Its simply supply and demand.

[golfguru]

10. So we borrow from China to temporarily boost home sales?

Then who will be stuck with the debt which will
last for ever since there are no budget surpluses
as far as the eye can see?