I say we officially call this one Cash For Houses:
With 85% of 1st time home buyers who were eligible to collect the tax credit planning to buy a home anyway, the Brookings institute estimates that the $8,000 credit equates to a cost to the taxpayer of $43,000 per home. This is based on the belief that 85% of the almost 2mm buyers are getting free money.
The tax credit is very poorly targeted. Approximately 1.9 million buyers are expected to receive the credit, but more than 85 percent of these would have bought a home without the credit. This suggests a price tax of about $15 billion – which is twice what Congress intended – for approximately 350,000 additional home sales. At $43,000 per new home sale, this is a very expensive subsidy.
It’s even worse in that most of the new home sales just result in moving renters to owners, which does not absorb the excess supply of houses. The core of our weak housing market is that the housing bubble led to too many homes being built, and the recession has led to a decline in household formation. By moving renters into owners, the tax credit does not address either of these causes.
An extension and expansion of the tax credit will cost far more than the $15 billion of the current credit, likely in excess of an additional $30 billion. And the cost per new house sale will likely be much higher going forward, as a greater proportion of the sales will be for those who would have bought anyway, without the credit.
Finally, there are two larger points we should not lose sight of. First, tax expenditures are not a free lunch. The billions of dollars spent on the tax credit will ultimately have to be paid back through higher, economically distorting, taxes. And while a tax credit is unlikely to be the straw that breaks the camel’s back, our growing debt burden is something to fear. Second, government policies to promote homeownership (or, more accurately, home-borrowership) were partial contributors to our housing and credit market problems. Ultimately, we need to decrease the government’s housing incentives, including the mortgage finance subsidies, the mortgage interest deduction, and the favorable capital gains treatment for housing. A good place to start this weaning would be by not extending or expanding the home-buyer tax credit.
Makes sense to me, which is why Congress is likely to extend the tax credit anyway.
The credit may not be ideal, but it’s all we have. The government would be better off trying to keep people in their homes, but I don’t see that actually happening.
If we only focus more on reducing the number of sellers rather than increasing the number of buyers we may start to address the issue.
The tax credit just hasn’t worked as planned. Foreclosures are continuing to mount and more homes are falling delinquent. Maybe they will extend it? Good luck.
[...] This shouldn’t come as a surprise considering that the first version of the tax credit, which only applied to first-time homebuyers, was estimated to have cost the taxpayers $ 43,000 per home sold. [...]
[...] is that the HTC involves government manipulation of the market that, in it’s first version, cost the government about $ 43,000 per house sold and, in it’s second, did little to actually create new economic [...]