The New Homebuyer Tax Credit
Last week the President signed a new $24 billion stimulus bill including measures to extend jobless benefits, to provide tax relief for struggling businesses, and to expand the homebuyer’s tax credit introduced earlier this year. The measure passed the Senate unanimously (98-0) and the House overwhelmingly (403-12) and was signed by President Obama. Ordinarily I would expect to applaud any measure that can be passed with such bipartisan support in these times of arch-partisanship but the homebuyer tax credit portion of this bill really leaves me shaking my head in wonder and frustration. I cannot understand how Washington can come to the conclusion that this bill makes any kind of sense as a vehicle for stimulating the economy or is at all efficient as a tool for supporting housing prices especially given the history of the credit this year.
The original program introduced in February (improving a less effective measure from 2008) provided a tax credit up to $8000 (or 10% of the home’s value, whichever is less) for first-time home buyers who earned up to $75,000 (or $150,000 for couples filing jointly). Roughly 1.4 million people have taken advantage of the credit which continues for closings before November 30th. Analysts suggest that no more than 400,000 of those purchases were motivated by the tax credit and the vast majority were purchases that would have taken place anyway (sounds a lot like “cash for clunkers” doesn’t it?). Nevertheless, the economy was in serious distress when the program was introduced and even if the tax credit only moved purchases forward it did help to stabilize the economy and the housing market. The housing market is still in trouble in many areas of the country, mostly those that had experienced enormous bubble-like increases in home values in recent years; but there are many areas where home prices have stabilized if not increased. Jobs, not housing prices, should be our economic priority and this bill does very little to help in that area.
Not only does the new stimulus bill extend the homebuyers tax credit (for closings prior to April 30, 2010) but it expands the program in two ways: first, it’s no longer limited to first-time buyers, and second, it raises the income limits for eligible taxpayers. That’s right, if you’ve lived in your current home for at least the last five years you can “trade up” and claim a $6500 tax credit on the purchase. Presumably these buyers will need to sell their current house in order to purchase their new home so how this will stimulate the economy, effectively and efficiently support the housing market, and create jobs, is beyond me. Even crazier, this bill now allows individuals with incomes up to $125,000 per year (and $225,000 for couples filing jointly) to claim the $8000 tax credit on first-time home purchases — as if these are the taxpayers who need a break!! And it doesn’t end there – the tax credit extends in smaller amounts to people of even higher incomes until it eventually phases out. And Congress voted for this in overwhelming numbers!
I’m not an economist but it isn’t difficult to come up with better ideas to address the housing crisis than a blanket credit including benefits to people who are among the best paid in the country (the same people who will face higher taxes under health care reform). How many new first-time homebuyers are left after the generous credit in place the last 10 months? How is a trade-up provision helpful? Giving tax breaks on new home purchases will hardly change current economic condition. If the analysts are correct about the numbers of new purchases created by the tax credit (350,000) then each home cost taxpayers over $30,000 assuming a total cost under
the existing program of about $11 billion (and a similar amount expected under the new program). Can anybody else think of a better way to spend that money?! Instead, how about tax credits for purchases of new refrigerators, washing machines, dish washers, lawn mowers, etc — core home purchases in industries that provide jobs? How about giving cities credits to hire new teachers or policemen — real jobs in areas of genuine concern to all Americans – education and safety?
The stock market is a leading indicator (meaning it tends to turn higher/lower ahead of actual reported changes in the economy) and job growth is a lagging indicator (meaning companies typically wait for genuine signs of improvement in their business before starting to hire new employees which are then reported a month later). The stock market has experienced an impressive rally while job losses continue to mount with unemployment at 10.2%. If the stock market has it right then the economy will begin improving soon and jobs will return shortly thereafter. Meanwhile, however, the headline numbers are depressing and people’s confidence is extremely low. I fail to see how this homebuyer’s tax credit is a good way, not to mention the best way, to address the overriding issues of confidence and jobs.
This will be a short term benefit to the housing market, but a long term threat to the national debt and will in the end put some people into homes they cannot afford. The government simply cannot pay for your house or even a portion of it. Putting more money into circulation will in the end lead to higher prices and higher interest rate in a vain attempt to control what will become run-a-way inflation in the near future.
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Very good article, Mike. As you, I am no economist, but it seems plain to me that there are much better ways to stimulate the parts of the economy that need stimulating. If you ask me, they have this all backwards. Let me explain.
How are people supposed to purchase a new home or some other major item, if they do not have a good job? The answer is large tax credits from the government, of course. (Sarcasm fully intended.) They seem to be trying to stimulate last things first. If they would focus on trying to stimulate jobs, then doesn’t it make sense that home purchases would go up, once the jobs have recovered?
They are trying to send the cart down the road before the horse is even out of the stall.
Good article, Mike.
Haven’t we been here before? The Bush administration and Congress brought us The American Dream Act and Zero Downpayment Act that effectively brought millions of new buyers to the homeowner table. Many of these people were not financially prepared to maintain their homes nor their ridiculous loans, and millions of homes are now “upside down” in equity. In short, this government meddling in a financial sector encouraged many who were not ready for homeownership to get in the game , and our real estate market is suffering the consequences as those with literally nothing to lose bail on their homes.
You make a good case that most of the credits have gone to those who were already planning to buy. I wonder, though, how many of the 400,000 buyers who were lured by the program are just as financially ill-prepared to be owners as those who took advantage of Zero Down payment et al.
I also wonder about current lending practices and standards. Much noise has been made about the tightening of credit markets, yet many still quesiton whether irresponsible lending is still too prevalent. Do you have any insight in this?
Thanks Laurie. I don’t have any great insight but by most accounts credit is still extremely tight with credit card companies jacking some rates up to 30%. Banks will not offer mortgages even to excellent credits because of the difficulty/impossibility of reselling those mortgages to bundlers who created the infamous mortgage-backed securities. I haven’t heard much grumbling about ongoing irresponsible lending practices but there are always those looking for a fast and easy dollar.
That’s a lot of money being expended to help people get a home. Plus, our national debt is mushrooming with each tax credit.
I think that the federal government needs to stop tinkering with the economy. Booms and busts come and go no matter what the politicians do. However, by pouring money into the housing sector our national debt will continue to rise, saddling future generations with a heavier debt load.
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