By Martha C. White
Sunday, October 4, 2009
Never mind end-of-life care discussions for senior citizens. We need to have one right now about the home buyer tax credit. The powers that be need to let this program die with dignity when its time comes rather than letting it linger.
As anyone buying or selling a home knows, the government will give you a tax credit of 10 percent of the home's purchase price up to $8,000, provided neither you nor your spouse has owned a home in the past three years. Your new digs have to be your primary residence for three years, and you cannot make more than $75,000 a year (double that if there's two of you).
This incentive was launched by the government earlier this year and is set to expire Nov. 30. But if the real estate and construction industries have their way, the program will go on life support until at least next year and perhaps indefinitely. Several members of Congress have drafted or voiced support for bills calling for extensions or expansions of the initiative. One version, introduced in the Senate by Georgia Republican Johnny Isakson, would extend the program through 2010, raise the credit to $15,000 and be available to all home buyers, regardless of current housing status or income level. Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) has voiced his support, as has Senate Majority Leader Harry M. Reid. (It's worth noting that Reid hails from Nevada, a state that's been especially hard hit by the real estate crisis.)
Extending the credit and expanding its scope is a bad idea on several levels. For starters, let's look at the program's return on investment. According to the Internal Revenue Service, 1.4 million homes have been bought since the credit's inception; the National Association of Realtors gives a somewhat higher figure of 1.8 million to 2 million. (Either way, the program is going to cost about $15 billion if it winds down as planned, according to the Associated Press.) And yet, according to the NAR's own math, the tax credit was the make-or-break factor in only 350,000 of those sales. The National Association of Home Builders, another industry group lobbying to extend the credit, places this figure even lower, at 150,000. In other words, the vast majority of home buyers would have signed on the dotted line even without the government's incentive.
As any marketing professional knows, you don't measure a campaign's success by how much it costs but by how much it costs per person to persuade people to change their behavior. As the observant bloggers at Calculated Risk have pointed out, when you divide the number of "conversions" (that is, people who bought a house only because of the tax credit) by the total amount spent on the program, the numbers look very different. Now, instead of the program costing $8,000 per buyer, it costs $43,000 -- not a great use of taxpayer dollars.
That's not the only problem. The credit also artificially inflates the value of eligible homes sold by up to $8,000, leaving the buyer with a debt that's greater than the value of the property. Sound familiar? Inflated home values were a big part of what got us into this mess in the first place. Perpetuating this via the tax credit might lessen the pain in the near term, but as we've all learned the hard way, a correction's going to come sooner or later.
What's more, the credit creates skewed incentives. America's tax code is tilted heavily in favor of home ownership; if you own your house, you get to deduct the interest you pay on your mortgage as well as the property taxes. Plus, the more house you own, the more you can deduct. Some economists think this encourages buyers to stretch for a McMansion instead of buying a more modest abode; following this logic, dropping the income cap and first-time requirement on the tax credit would only increase that effect.
After all, there are already plenty of stimulus efforts aimed at shoring up the housing market. On the monetary policy side, the Federal Reserve is keeping interest rates at rock-bottom levels, making it cheaper to borrow money, including for mortgages. With regard to fiscal policy, initiatives such as the payroll tax cut give Americans more money in their paychecks, letting them build a down payment faster or giving them more per month they can spend on housing.
The real estate association and its allies are right in the sense that the tax credit did spur sales, but there's a serious asterisk after that claim. Take a look at post-"Cash for Clunkers" auto sales for a recent example. Everyone who might have bought a car later this year rushed to do so before the program expired, and the resulting hangover--dealer traffic slowed to the lowest level in nearly three decades after it ended--isn't pretty. Much as too many of us did with our home equity, we borrowed into the future to pay today's bills and have nothing left now that the future has arrived.
At best, the home buyer tax credit was a moderately effective crutch at a time when the residential real estate market needed it most. Take that crutch away come November and the market's still going to limp for a while. But the alternative means prolonging that healing process and, ultimately, the recovery.