Washington Post on the Economics of the Homebuyer Credit

 
 
October 27, 2009
By 

There has been substantial activity on Capitol Hill lately regarding a possible extension and expansion of the homebuyer credit. Simon Johnson and James Kwak delve into the economics of the credit in their online column in the Washington Post today. A few excerpts from their column:

The main argument for the tax credit is that it stimulates the economy and stabilizes the housing market. Seen purely as a stimulus, the tax credit is highly inefficient. The National Association of Realtors claims that the credit created 350,000 new sales; the Calculated Risk blog calculates that this means the government is paying $43,000 for every extra house sold (since most sales would have happened anyway). According to the Wall Street Journal, Goldman Sachs estimates 200,000 new sales, implying a cost of $80,000 per marginal sale.

They go on to point out that while some of this cash, which ends up in the pockets of people selling homes, will go on to further stimulate the economy through increased consumption, the multiplier of such a stimulus is likely to be low compared to other possible uses, such as hiring more teachers or police officers.

But the tax credit stabilizes the housing market, people say. What does this mean? It means that the credit keeps housing prices artificially high. But housing is something that all people need. Why do we want it to be expensive? Would we want government policies that artificially push up the price of food? (Wait, we have some of those already . . . but that's a matter for another column.)[...]

A temporary tax credit [...] boosts the price of a transaction that would have happened anyway. It may create additional transactions, but is that a good thing? If someone could not have afforded a house without the tax credit, then what is he or she going to do when the tax credit goes away and the price of the house falls? In effect, the tax credit is a way of making houses temporarily affordable that would not otherwise be affordable, and we know where that leads.[...]

Even if you want to encourage homeownership, it hardly follows that the solution is to make houses more expensive. Ultimately our housing "policy" suffers from the idea that changing the level of prices on existing housing can provide a net benefit to society; because sales of existing houses are essentially zero-sum transactions, changing the price level is purely redistributive.

Given the serious possibility that housing prices are currently being propped up by the tax credit -- Goldman estimates by 5 percent -- we can understand the argument for, at most, a gradual phase-out to smooth out the inevitable downward adjustment. But anything more would be throwing good money after bad.

We have blogged before on the possibility of an extended and expanded homebuyer credit.

Buy this blogger a cup of coffee!

Sizes

Follow Us

About the Tax Policy Blog

Subscribe to Tax Foundation - Tax Foundation's Tax Policy Blog The Tax Policy Blog is the official weblog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.

Monthly Archive

Privacy Policy