TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, August 31, 2010

The Homebuyer Tax Credit -- What Was It Good For?

The Guardian, Home Truths for Complacent Economists:

What should be clear is that the tax credits helped to pull housing demand forward. People who might have bought in the second half of 2010, or even 2011, instead bought their home before the tax credit expired. Now that the credit has expired, there is less demand than ever, leaving the market open for another plunge in prices. The support the tax credit gave to the housing market was only temporary.
It is worth asking what was accomplished by spending tens of billions of dollars to prop up the market for a bit over a year with these tax credits. First, this allowed millions of people to sell their home over this period at a higher price than would have otherwise been the case. The flip side is that more than 5 million people bought homes at prices that were still inflated by the bubble. Many of these buyers will see substantial loses when they resell their house.

The banks also had a stake in this. The homebuyers' tax credit prevented prices from declining as rapidly as would otherwise have been the case. This enabled millions of homeowners to sell their home at a price where they could pay off their mortgage. This made banks who could have been holding underwater mortgages very happy.

Of course, someone had to issue the mortgage to all those people who bought homes at prices that are still inflated by the bubble. The overwhelming majority of the mortgages issued in the last year and a half are insured by the government, either through Fannie Mae and Freddie Mac, or through HUD. So, taxpayers, not banks or private investors, are carrying the risk that further price declines will push these mortgages underwater.

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"What should be clear is that the tax credits helped to pull housing demand forward. "

Yep. That's all it was ever going to do. Now, of course, we hear the crickets chirp on houses for sale near you.

Posted by: Amy | Aug 31, 2010 3:42:03 PM

And, does anyone know why used car prices have climbed so high and why new car sales are down? Could it possibly, just maybe, have anything to do with the "Cash for Clunkers" program destroying perfectly good used cars and pulling future new car purchases to an earlier year? Just wondering.
Maybe these government incentives need a little more thought.

Posted by: Woody | Aug 31, 2010 6:47:03 PM

Well, you can't expect everything you try in an emergency to work that well. Probably "cash for clunkers" worked better than real estate tax credit. Extension of unemployment benefits probably has more stimulative effect than either.

NYT says house credit cost $30 billion. We could have done some much-needed repair to our highways or built two high speed rail lines in the midwest or south for that price and had something to show for our money.

Posted by: jimharper | Sep 1, 2010 12:18:14 PM