The Expensive Home Buyer Tax Credit

One of the more interesting numbers to come out yesterday was the cost per marginal homeowner of the $8000 first time homebuyer tax credit. It’s a rather astounding $43,000. That’s what it costs to lure those that wouldn’t have bought into the market.

A couple sites in the blogosphere talked about this but, as usual, no one did it better than Calculated Risk. From that fine blog here is how the numbers shake out:

With regards to the tax credit, what really matters is the cost per additional home sold. And as I pointed out earlier today, even using the NAR numbers, the cost per additional home sold is $43.4 thousand.

Here is the math: 1.9 million buyers qualify for the credit (the NAR estimates between 1.8 and 2.0 million) = $15.2 billion.

The NAR estimates the tax credit resulted in 350 thousand additional purchases. So divide $15.2 billion by 350 thousand = $43,000 per additional home. And the numbers will get worse if the program is extended.

This is not a trivial point as what’s at stake here is once again a government program that picks winners and then uses the fisc to subsidize those so chosen. The goal of jump starting a particularly important part of the economy may be laudable but the results are less so. Realistically, an additional 350,000 home sales is little more than a rounding error when put up against the scale of the US economy, yet the cost of achieving this result is anything but. A $15.2 billion expenditure is meaningful even in terms of the bloated numbers we tend to toss around these days.

It’s, I suppose, hard to get too worked up about this given the generosity of the government towards the banks and others but it still represents a disturbing trend. Stimulus of this sort might or might not result in greater multipliers, be more efficient or just generally preferred by economists but the social cost is high. Once again it brings me back to the idea that we would be much better off just reducing individual tax burdens and sending money directly to those who don’t pay taxes as opposed to the schemes we’ve adopted.

Whenever the choices of who will and will not benefit from government largesse is left to the politicians, a great deal of inequality and inefficiency seems to follow. The new homebuyer tax credit seems to be shaping up nicely in that mold.

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About Tom Lindmark 401 Articles

I’m not sure that credentials mean much when it comes to writing about things but people seem to want to see them, so briefly here are mine. I have an undergraduate degree in economics from an undistinguished Midwestern university and masters in international business from an equally undistinguished Southwestern University. I spent a number of years working for large banks lending to lots of different industries. For the past few years, I’ve been engaged in real estate finance – primarily for commercial projects. Like a lot of other finance guys, I’m looking for a job at this point in time.

Given all of that, I suggest that you take what I write with the appropriate grain of salt. I try and figure out what’s behind the news but suspect that I’m often delusional. Nevertheless, I keep throwing things out there and occasionally it sticks. I do read the comments that readers leave and to the extent I can reply to them. I also reply to all emails so feel free to contact me if you want to discuss something at more length. Oh, I also have a very thick skin, so if you disagree feel free to say so.

Enjoy what I write and let me know when I’m off base – I probably won’t agree with you but don’t be shy.

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1 Comment on The Expensive Home Buyer Tax Credit

  1. Sorry but your analysis makes no sense. The number of eligible buyers is irrelevant, the cost is only attributable to those who actually took the credit. If in fact 350,000 buyers take the credit and each gets the whole 8,000, the “cost” our children and grandchildren will pay is 2.8 billion in current dollars(350,000 x 8000 Equals 2,800,000,000.00)still a lot of “money”.
    Having said that, printed money (all we have left)is now and will always be worth no more than the underlying value of the paper and ink plus the value we collectively give it. The market will ultimately correct itself but probably after the current political class are in their graves. We are currently paying the price for the NewDeal, the Great Society, and inumerable wars, programs and welfare schemes.

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