Paul L. Caron

Wednesday, July 13, 2011

$22 Billion Housing Tax Credit Program Utterly Failed as Economic Policy

Jonathan Brogaard & Kevin Roshak (both of Northwestern University, Kellogg School of Management) have posted The Effectiveness of the Financial Crisis Housing Tax Credit Programs on SSRN. Here is the abstract:

Fiscal stimulus has been suggested as a tool to prevent excessive price declines by creating incentives to increase current demand. In 2008 and 2009 the U.S. Congress passed several housing tax incentive programs to encourage activity in the residential real estate market. This paper examines the impact of the different housing tax incentive programs on the demand for housing during the financial crisis. Using city level data we implement a differences-in-differences-in-differences methodology to isolate the impact of the tax credits on the quantity of housing transactions and their prices. We find that quantity was unaffected and that prices rose only temporarily. The results showed no statistically significant difference in quantity. However, prices in affected housing markets rose on average $6,509 more than unaffected markets during the program. This price differential more than reverses, falling $7,721 after the expiration of the final tax credit program. The speed of these price movements is quick. The price increase takes place largely within a month of the first large tax credit, and the price drop occurs predominately in the two months following the credit expiration.

The paper concludes:

This paper finds that (1) the home buyer tax credits had an insignificant effect on the number of homes sold, (2) sellers in markets with low and stable prices captured most of the credit, and (3) The effects of the credits sharply reversed after expiration. ... Rather than igniting 'animal spirits' or pulling housing demand forward from the distant future, the tax incentives were a simple redistribution of wealth.

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I agree with Nicholas. Sellers and banks will have benefits from this, but buyers will definitely be in very bad position...

Posted by: Stefan | Jul 13, 2011 3:40:58 PM

Everything with this administration is unexpected except it's stupidity. Did any half sane and sober person realy believe that this was going to work? next the administration will be proposing credits to smash windows to create jobs for window installers.

Posted by: cubanbob | Jul 13, 2011 3:36:57 PM

The numbers certainly are damning but it seems there is more to this. I used to laugh at "animal spirits" economics but it sure explains why all these genius programs have all hit the wall so spectacularly. Did anyone anticipate that Cash for Clunkers would prove to be the high point of interventionism? It seems homo economicus is a wild animal still. He doesn't wish to be fed; he wants to hunt.

Posted by: megapotamus | Jul 13, 2011 2:05:38 PM

I guess we can add that $22 billion to the $2 trillion or so that the Community Reinvestment Act cost us in terms of having bad loans.

The National Community Reinvestment Coalition (NCRC) found [1] that from 1997 to 2007, $4.7 trillion in home loans were made under the Community Reinvestment Act (CRA). In 2007, over 50% of home loans were made to people who would normally have not qualified for one. According to a Reuters' story [2], “S&P now projects defaults on subprime loans issued in 2005, 2006 and 2007 at 11 percent, 30 percent and 49 percent, respectively.” These losses represent a good fraction of the $4.7 trillion lent under the CRA.

[1] NCRC, NCRC Documents Trillions of CRA Dollars in Communities since 1977; CRA Commitments: 1977-2005,

[2] Reuters, S&P raises loss expectations for risky US mortgages, July 6, 2009,

Posted by: theBuckWheat | Jul 13, 2011 12:35:58 PM

At the time that they approved this legislation I wrote my senators and congressmen begging them to not engage in this utter stupidity that turned out to be the housing tax credit program. The responses were absolute rubbish from my elected officials, it was clear that no good thought went into this program beyond the face.

I pointed out clearly the following points:

1. Any home buyer that buys during this time will only be injured by the government intervention. The housing tax credit will inflate home prices temporarily and resulting home prices would fall after expiration. We saw the same type of action with the cash for clunkers program, another taxpayer funded transfer of wealth.

2. Beneficiaries of this action will be sellers, real-estate agents, banks, taxing municipalities. The seller as the beneficiary is diminished since most sellers were underwater. RE agents benefit because of higher sales volume (we now see that was only a temporary drag of demand forward though). Banks because they were able to unload more declining value properties during periods of higher prices as everyone with a brain could see that prices were in for a 15%-30% correction. Municipalities benefited due to higher tax base as they were able to raise assessments because higher prices were being paid because of the intervention.

3. The losers here are the taxpayers and home buyers. There are no tax breaks for renters. The home buyer during that period paid more for the house and paid more in taxes. Double kick in the crotch.

I told my elected officials that there was no way in the world I was going to buy a house during that period, I told everyone I knew that it was a giant middle finger to the buyer. I'm in the process of removing the elected officials that voted for that bill out of office.

I hate seeing stupidity in elected office. It is morally repugnant.

Posted by: Nicholas | Jul 13, 2011 12:30:45 PM

None of this was unpredictable (or, indeed, unpredicted) at the time. Note one of the implications: the program effectively guaranteed that its beneficiaries would be in the hole as soon as the program ended. It may have been a benefit to those who needed to sell, but it was a net negative for those who bought. One wonders how many of them ended up underwater on their mortgages as a result.

Posted by: Matt | Jul 13, 2011 11:05:31 AM

I'm shocked, shocked, to discover that government programs have unintended consequences.

Posted by: Yahzooman | Jul 13, 2011 10:49:53 AM