Time for Congress to Cancel a Temporary Tax Subsidy for Homebuyers
FOR THE NATION'S troubled housing market, things are looking tentatively but undeniably better. New-home sales, though still well below where they were a year previously, rose at a nearly 10 percent monthly rate in July. The median home price ticked up in 15 of 20 metropolitan areas in June, according to the S&P/Case-Shiller Home Price Index. This is important good news for the economy, because it promises an end to the foreclosure wave that has rippled across the country and because even families not threatened by foreclosure tend to trim their spending in times of declining home equity.
This fragile stability has been achieved through colossal government intervention in the housing sector. To hold down mortgage rates, the Federal Reserve has bought hundreds of billions of dollars worth of mortgage-backed securities on its way to a promised total of $1.25 trillion. The Treasury has taken on the debts and operational losses of Fannie Mae and Freddie Mac, which own or guarantee a combined $5.4 trillion in mortgages. The Federal Housing Administration, designed to insure mortgages for a relatively few low-income buyers, backed 40 percent of all new home loans (together with other agencies) in August, according to the Mortgage Bankers Association. Yet its losses have mounted: An audit shows that FHA reserves are about to fall below the legal minimum, which is 2 percent of the value of all loans guaranteed by the agency. In short, the very real risk of homeowner default is now more concentrated than ever before in the government's hands. That is perhaps necessary in an emergency, but certainly undesirable in the long run.
The housing market has also benefited from its own version of the "Cash for Clunkers" program, which Congress created for autos. As part of the February stimulus bill, Congress created an $8,000 tax credit for individual first-time homebuyers who make less than $75,000, or couples who makes less than $150,000; it expires in November. This was an expansion of a slightly less generous "temporary" credit Congress had adopted in 2008. The National Association of Realtors says that the policy generated 350,000 home sales this year. And, not surprisingly, the real estate industry and its supporters on Capitol Hill are calling for an extension of the $8,000 credit to save the incipient housing recovery. Sen. Johnny Isakson (R-Ga.) wants to make it $15,000.
The credit probably did stimulate home sales, just as Cash for Clunkers gave auto dealers a shot in the arm this summer. But, like Cash for Clunkers, the housing credit does not magically generate demand. It moves demand around -- from the future to the present, and from other consumers, and other sectors, to homebuyers and homes. These "results" don't come for free. Cash for Clunkers added $4 billion to the federal deficit, and the housing tax credit is on track to add $15 billion.
Congress should end this program while it still can. With hundreds of billions of dollars in support from the Fed, the Treasury and the FHA still in place, the housing market can survive without it. Indeed, the looming problem for the U.S. economy is how to wean housing off its dependence on federal backing. That job will be hard enough without adding yet another not-so-temporary subsidy to the list.