First-Time Homebuyer Credit is Popular, But Bad Policy

I formulated the first first-time homebuyer credit back in 1975 when I was a revenue estimator on the Joint Committee on Taxation.  I didn’t like the idea then, and I don’t like it now.  The credit rewards those who would have bought a home anyway, most of whom have higher income than the taxpayers who are paying for it.  The taxpayers are mostly renters and get no tax breaks at all.  The only justification I can see for the homebuyer credit is that it may accelerate home purchase from next year to this year.  The overall number of homes purchased this year and next won’t change much.  Check out this Urban-Brookings Tax Policy Center analysis, which makes these arguments in more detail.  This Congressional Research Service analysis shows how small the economic effect of the homebuyer credit is likely to be (See pages 7 and 8 for the results.).

The Joint Committee on Taxation estimated the first-time homebuyer credit would cost $4.6 billion when it was enacted on July 30, 2008 in the Housing and Economic Recovery Act of 2008 (P.L.110-289).  It increased that estimate to $6.6 billion when the credit was expanded in the American Recovery and Reinvestment Act of 2009 (P.L.111-5) enacted on February 17, 2009.  See the estimate in JCX-19, item 7 on the top of page 2.  Yesterday’s New York Times front-page story said the credit has become so popular that it may actually cost $15 billion.  That’s a lot of money for not much economic benefit and for a windfall to those have good enough credit to buy a home.

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About Pete Davis 99 Articles

Affiliation: Davis Capital Investment Ideas

Pete Davis advises Wall Street money managers on Washington policy developments that affect the financial markets. President of his own consulting firm since 1992, Davis Capital Investment Ideas, he draws on 11 years of experience as a Capitol Hill economist with the Joint Committee on Taxation (1974-1981), the Senate Budget Committee (1981-1983), and Senator Robert C. Byrd (1992). He worked in the House and Senate, and for Republicans and Democrats.

Davis brought the first computer policy model, the Treasury Individual Income Tax Model, to Capitol Hill in early 1974, when he became a revenue estimator on the Joint Committee on Taxation. He formulated the 1975 rebate, the earned income tax credit, the 1976 estate tax rates, the 1978 marginal tax rates, and the Roth-Kemp tax cut. He left Capitol Hill in 1983 for the Washington Research Office of Prudential-Bache Securities, where he advised investors for seven years.

Davis has long written a newsletter on the Washington-Wall Street connection for his clients; Capital Gains and Games is his first foray into the blogosphere.

Visit: Capital Gains and Games

3 Comments on First-Time Homebuyer Credit is Popular, But Bad Policy

  1. On the other hand, I have a 21 year old daughter who has a new degree and is ready to buy a house “on her own” instead of renting. This is a wonderful incentive in her case, and one less stress she has to deal with.

  2. Without the credit, the people who would’ve bought next year would allow the market to continue deflating now. This would create a chain of pull on all housing causing horrible comps, lower valuations, more people under water, and eventually even more foreclosures via jingle mail. It becomes a self-fulfilling cycle.

    As a streeter, think of the FTHB credit as a risk hedge. Buy a 160k house and have a 5% hedge against further value drops. Buy a 80k house and have a 10% hedge against drops. Those numbers are enough to get people off their butts and into the market. Without those numbers, people would be trying to time housing and just watch the market collapse.

    I know that without the $8000, I would not be buying a house this year. I’d be waiting for even cheaper prices next year. Whether the RE market would be higher or lower doesn’t really matter. I’d be preparing and saving for a larger down payment instead of jumping in this year.

    As for those who moan about the drop in the RE market, get over it. Houses were too expensive to maintain their inflated values for more than a decade. It was never going to work. Any smart 8th grader could figure it out. The housing market isn’t depressed right now… it’s stable and in-line with existing employment numbers and average incomes. A depressed market would go even lower, while an inflated market will outperform income by more than 1-2% over a significant period of time.

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