Paul L. Caron
Dean




Thursday, May 12, 2011

How the $8,000 Tax Credit Cost First-Time Homebuyers $15,000

Smart Money, How the $8,000 Tax Credit Cost Home Buyers $15,000:

The government's recent $8,000 cash incentive for first-time home buyers has proved even more costly for recipients than for taxpayers, according to data released Monday. Typical buyers have lost twice as much to price declines as they received from the program.

The median home value fell to about $170,000 in March from $185,000 a year earlier, according to Zillow.com. That means a buyer who closed on a house just before the tax-credit program expired in April 2010 collected $8,000 but has since lost $15,000 in value. Those who bought earlier in the program have done worse; the median price is down $20,000 from March 2009. ...

The credit wasn't great for taxpayers, either. IRS says it paid $26 billion in home buyer credits in 2009 and 2010, enough to cover the maximum $8,000 credit for more than 3 million buyers. (It says at least $513 million went for fraudulent claims. Some claimants hadn't bought houses. Some filed twice. Some were under age 18 or incarcerated.)

https://taxprof.typepad.com/taxprof_blog/2011/05/how-the-8k.html

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Tracked on May 13, 2011 6:16:13 AM

Comments

My experience was more positive. I bought a repo'd and condemned duplex for $50K, took the $5k rebate and threw $30K into it, passed the inspections, moved in, borrowed $80K. It was my civic duty to add liquidity in my own small way to the real estate market.

Last sale of the house was in 2004 at $220K. Assessed at 122K. Ins. says replacement cost is $300K.

Util the repos wash through, I don't see why a knowledgeable buyer would pay $300K for a new house. It looks kind of grim for new construction.

Posted by: Grandson of Thor | May 13, 2011 12:22:05 AM

The homebuyer tax credit was a bad deal for taxpayers and no real benefit for the buyers; really just a windfall for sellers and their agents. However, IMHO, it is a mistake to highlight this article by Hough found at SmartMoney.

Hough's problem is that he misuses the statistics to sensationalize his claim. He states:
The median home value fell to about $170,000 in March from $185,000 a year earlier, according to Zillow.com. That means a buyer who closed on a house just before the tax-credit program expired in April 2010 collected $8,000 but has since lost $15,000 in value.

His statement is only "true" if the buyer bought a median price home (and then only if the buyer's market mirrored the national average). Nowhere in his article does he provide any statistics to show that the average recipient of the credit was buying a median-priced house. I have strong doubts that it happened. The credit was designed originally for 1st time buyers, who generally aren't in a position to afford a median priced home. From what I was able to see of the program as a practicing attorney, most of the people here in Cedar Rapids using the credit were buying homes significantly below the median price. I can't think of any reason why that would be different in other markets, especially not in places like CA where housing prices are insane compared to the Midwest.

I actually clicked over to read Hough's source and found that the "bottom tier" of homes did the worst in the past year, falling at 13.9% for the past year, but overall only 74.5% of homes lost value for the year. (So 25.5% of first time home buyer credit recipients didn't lose any money?) See http://www.zillow.com/blog/research/2011/05/08/no-respite-from-housing-recession-in-first-quarter/

I'm not sure what constitutes the Zillow 3 tiers, and I have questions about the validity of their national averages. A chart at the website listing results by metro area showed no data for Cedar Rapids, Iowa, for Davenport, IA, for Omaha, for Duluth, or Kansas City, to name but a few. Our Cedar Rapids newspaper a few days ago reported a drop of about a 3% in home sales values from a year ago.

I don't think Hough's sensationalism exemplifies conservative values.

Other than that, keep up the great work on this blog.

Posted by: Jim Radig | May 12, 2011 8:12:52 PM

So, is this the Hope, or the Change?

Posted by: P. Aaron | May 12, 2011 7:38:07 PM

It was a sucker's game. You don't have to understand too much about economics to know that the $8,000 subsidy was used to prop up prices. When the prop expired, the decline recommenced.

Someone taking advantage early in the program could reasonably gamble that the economy would improve by the end of the subsidy, but the people "taking advantage" of the program in its closing months were fools soon to be parted from their money.

Posted by: tim maguire | May 12, 2011 7:15:06 PM

This is your Government at work...

Posted by: Jim | May 12, 2011 6:11:53 PM

So $26 Billion. Eight (+) years of the oil companies tax credit are gone in a program with no positive result.
Senate hearings in 3, 2, 1 ?

Posted by: OldNaCl | May 12, 2011 5:31:06 PM

Mostly the credits funded FHA loans and underwrote the down payment, so taxpayers are on the hook for the whole loan. I thought destroying 600,000 functioning cars was dumb, but this....

Posted by: Guy in the Veal Calf Office | May 12, 2011 9:56:30 AM