Want $15K? Swap Homes With Your Neighbor!

Back in January, the Senate briefly entertained the idea of giving a $15,000 tax credit to all new homebuyers, before reducing the credit to $8,000 and restricting eligibility to first-time homebuyers earning less than $75,000 per year. Now Senator Johnny Isakson (R-GA) has reintroduced the $15,000 proposal, without the first-time-buyer and income restrictions.

Now don't get me wrong, I'm all for helping the housing market, but I have to wonder whether such a subsidy is the most effective use of taxpayer funds. Even if the plan didn't spur home sales, so that they continue at the current annual rate of 4.5 to 5 million, then the plan would cost something like $70 billion. That's nearly equal to the entire projected cost of Obama's housing plan. And since in reality the number of sales would almost increase under this proposal, the cost could be substantially higher.

What would we taxpayers get for this steep price tag? Not as much as we should. First, if the supply of housing is relatively stable, then most of the subsidy would translate into an increase in house prices, rather than greater purchasing power for buyers (which, according to the linked article above, is one of Isakson's stated goals). And even if the supply of homes for sale increases as house prices rise, sellers are likely buy new homes in turn, so that at least the supply relative to demand is fairly stable.

Second, if we're going to transfer wealth directly to homeowners, why not do it in a way that directly targets the most beleaguered parts of the market? We could, for example, spend the money on reducing homeowners' negative equity or subsidizing loan modifications, both of which would have a larger impact on foreclosures than a blanket price increase. Third, the proposal would create an inefficient incentive to move into a new house, even if for homeowners perfectly happy in their current abode.

Finally, the proposal seems ripe for schemes, like agreeing to swap homes with your neighbor. Even if regulations are implemented to reduce such inefficiencies, such regulations are in turn costly; it would be better to design a proposal that creates the right incentives in the first place. 
Presented by

Benjamin Lockwood

Benjamin Lockwood is a researcher at Columbia University Business School.

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