Bounding the Price Impact of the New Home Buyer Credit

The IRS says that $19 billion of tax credits have been paid. Assume, for the moment, that:

  • The credit was well targeted in the sense that (as NAR claims) it reached 1,000,000 persons who would not have purchased a house otherwise,
  • These 1,000,000 persons received a credit of $7,000 (close to the maximum of $8k, and equal to the average among those found to be cheating),
  • All owner-occupied homes are perfect substitutes with each other,
  • Owner-occupied homes are in fixed supply, and
  • The persons receiving the credit previously lived in dwellings that are not substitutes for owner occupied homes.

Of the 1,000,000 who supposedly bought homes because of the credit, some of them would have been induced to buy with a much smaller credit (say, $100) and others needed the entire credit. Note that housing prices had to go up LESS than $7000 because the price increase would have just canceled the credit and nobody would have been induced to buy. $3500 is a good guess for the price increase (given the assumptions above), and would be exactly right if marginal potential new buyers were uniformly distributed in terms of their willingness to pay.

The average home in 2009 sold for $217,000, of which $3500 would be 1.6 percent.

1.6 percent is still less than the housing price increase reported by Case-Shiller over the most recent twelve months. So, even if a 1.6 percent impact were not exaggerated, housing prices would have been stable or increasing over the past year even without the credit.

Moreover, the 1.6 percent impact is exaggerated. First, homes were sold to buyers who did not get the credit, and those buyers did not compete directly with buyers who did (for example, vacation homes or larger homes that are typically sold to buyers who already own a home). Those homes count in the housing price index, and had a price impact of much less than $3500.

Second, owner-occupied homes are not in fixed supply — indeed much of the construction activity over the past year has been attributed to the credit (this is an exaggeration too). To the degree that the supply of homes was impacted by the credit, housing prices increased less than $3500.

Third, the persons receiving the credit were living somewhere before they purchased their credit-eligible house. Their former dwelling is on market, pushing down housing prices.

One back-of-the-envelope way to consider all of these effects is that each cuts the price impact in half, so that the price impact is $438 ($3500/8) or 0.2 percent. In this case, the main effect of the credit was to cause a few new houses to be built and a couple of million families to switch swap residences with each other.

Regardless of whether the price impact was $400 or $4000, the fact is that housing prices and construction activity stopped falling a year ago, and it is a wild exaggeration to claim that the pattern would have been much different without the new home buyer tax credit.

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About Casey B. Mulligan 76 Articles

Affiliation: University of Chicago

Casey B. Mulligan is a Professor in the Department of Economics. Mulligan first joined the University of Chicago in 1991 as a graduate student, and received his Ph.D. in Economics from the University of Chicago in 1993.

He has also served as a Visiting Professor teaching public economics at Harvard University, Clemson University, and Irving B. Harris Graduate School of Public Policy Studies at the University of Chicago.

Mulligan is author of the 1997 book Parental Priorities and Economic Inequality, which studies economic models of, and statistical evidence on, the intergenerational transmission of economic status. His recent research is concerned with capital and labor taxation, with particular emphasis on tax incidence and positive theories of public policy. His recent work includes Market Responses to the Panic of 2008 (a book-in-process with Chicago graduate student Luke Threinen) and published articles such as “Selection, Investment, and Women’s Relative Wages,” “Deadweight Costs and the Size of Government,” “Do Democracies have Different Public Policies than Nondemocracies?,” “The Extent of the Market and the Supply of Regulation,” “What do Aggregate Consumption Euler Equations Say about the Capital Income Tax Burden?,” and “Public Policies as Specification Errors.” Mulligan has reported on some of these results in the Chicago Tribune, the Chicago Sun-Times, the Wall Street Journal, and the New York Times.

He is affiliated with a number of professional organizations, including the National Bureau of Economic Research, the George J. Stigler Center for the Study of the Economy and the State, and the Population Research Center. He is also the recipient of numerous awards and fellowships, including those from the National Science Foundation, the Alfred P. Sloan Foundation, the Smith- Richardson Foundation, and the John M. Olin Foundation.

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