Home -> Law Blog Directory -> Bailout Blogs -> Calculated Risk

Bailout

: Calculated Risk

Home Tax Credit a Costly Failure

By Anonymous

From David Kocieniewski at the NY Times: Home Tax Credit Called Successful, but Costly

Though the Treasury Department and the real estate industry have termed the program a success, helping 1.8 million people buy homes, many tax policy experts say it has been singularly cost-ineffective: most of the $12.6 billion in credits through end of February was collected by people who would have bought homes anyway or who in some cases were not even eligible.

There is no question this program was very costly. And why is the Treasury confusing activity with accomplishment? Sure sales briefly surged, but were new households formed? How many new jobs were created?

?We were happy in our apartment, but $8,000 was just too much to pass up,? said [Mr. James Green, a student at Purdue University], 29, who shopped furiously with his wife for two months before signing a contract in March to buy a three-bedroom ranch.

?We bid on a couple places that didn?t work out,? he said, ?but we always made sure we had a backup plan because we didn?t want to miss the deadline for the credit. And when we finally agreed to a contract, it was this huge relief.?

For every home buyer like the Greens, real estate agents say there are at least three others who collected the credit even though they would have bought without it. That means for each new buyer who was truly lured into the market by the credit, the federal government paid more than $30,000.

This is very optimistic - the ratio was probably 5-to-1 for the initial credit and even higher for the extension. But this shows two failures of the tax credit: 1) the high cost, and 2) it was just moving people from apartments to homes and didn't reduce the excess housing inventory (yes, rentals count as housing inventory too).

?The tax credit helped to stanch the price declines, which had substantial benefit for the entire economy,? said Mark Zandi at Moody?s Economy.com.

And this has been the policy - support asset prices by limiting the supply (all the foreclosure delays), and pushing demand (low mortgage rates and the tax credit). This has helped the banks significantly, and Zandi argues this has boosted confidence. Maybe ... but I'm not convinced that supporting house prices above the market clearing level to help the banks and boost consumer confidence makes sense. I think targeting jobs - and therefore household formation - would have been a far more cost effective program.

Full post as published by Calculated Risk on April 27, 2010 (boomark / email).