Should Congress Keep the First-Time Home Buyers Credit?

The New York Times has an article today about the brewing battle for the first-time home buyers' credit. Just yesterday I was talking with someone about the credit, and the importance it has served in stabilizing the housing market. It's set to expire in late November. Congress then has to decide whether to renew it. I think keeping the credit is practically a no-brainer.

The public is getting increasingly antsy about the copious amounts of money that Congress has been spending recently. That should make the fight to renew the credit a little bloodier. The Republicans are branding themselves as the party of fiscal responsibility these days, complaining about the amount of spending by Democrats every chance they get. Yet, Republican resistance to a tax credit would be surprising -- especially this one. After all, they wanted the first-time home buyers' credit to be even larger.

But if Congress is going to spend, then it seems completely obvious that this credit is a good way to continue to stabilize the housing market until we see a full recovery. Its success so far is clear: it has exceeded even Congress' wildest expectations. The Times reports:

It is on track to cost the government $15 billion, more than twice the amount that was projected when Congress passed the stimulus bill in February.

Congress is awfully good at estimating how much its programs cost, isn't it? But this vast underestimation shows how much demand the credit must have created.


The New York Times presents a few arguments from critics:

Skeptics argue that most of the money is going to people who would have bought a home anyway. And they contend that unless it is allowed to expire on schedule in late November, the tax credit is likely to become one more expensive government program that refuses to die.

The first point seems completely wrong to me. The U.S. housing market got so screwed up that it brought down the entire financial sector and created a global recession. Never have renters triumphed like they have over the past few years, when their homeowner friends have lost thousands of dollars in equity. As a lifelong renter who had some savings that could have went towards a first-time purchase, I had little intention of playing with that fire.

By providing a hefty credit, you take some of that risk out of the picture. I still didn't end up buying, but when trying to decide if I should continue to rent this summer or buy, I definitely took the credit into my calculations. It can make a huge difference, and surely resulted in lots of new buyers entering the market when they may have been scared to do so earlier. (Unfortunately, purchasing a decent house/condo in the Washington metro area was still a bit out of my price range!)

The second point really contains two criticisms. First, it is likely to remain a relatively expensive program. But it's worth the price. If you want to revive the economy, there are few better ways of doing so than stabilizing the housing market. The broader economy will not recover until real estate gets healthier.

And I have no clue why extending the program once would lead to it refusing to die. Once the economy does recover, probably sometime in late 2010 or 2011, then Congress can, and should, end the program. At that point consumer confidence for housing will be sufficient to maintain average non-bubble demand.

There's another criticism that a credit like this could just be pulling demand forward, as with Cash for Clunkers. I have two responses. First, the risk of purchasing a home felt by new buyers is far greater than that to buy anything else during this recession, since that market now seems particularly scary to those unfamiliar with it. As a result, the program will bring back demand that should already have been there under normal market conditions. Second, it will likely pull forward some demand, but that's okay -- you need that demand to reduce the excess inventory and to stabilize the real estate market. Once the housing market is back to normal, slightly lower demand is better than a lengthened period of instability.

Why Not Use The Homeowner Bailout Money?

One final thought: why not use some of that $75 billion set aside for the housing bailout to fund the program for 2010? Given its rather weak performance thus far, I'm sure there's still plenty of money left to play around with. The program was supposed to create seven to nine million modifications, which means that they would cost approximately $9,375 each. Even if the modification program manages to hit its goal of re-working 500,000 mortgages by November, then it would still have used only $4.7 billion of what was allocated. Why not take $15 billion for 2010 first-time home buyer credits? That would still leave the modification program way overfunded.

I'd even argue that the first-time home buyers' credit does a better job stabilizing the housing market than the modification program. According to the Times:

The National Association of Realtors estimates that about 350,000 sales this year would not have happened without the lure of the tax credit. Moody's used computer modeling to put the number at 400,000.

I think those are very, very conservative estimates. By the end of November around 1,875,000 will have taken advantage of the credit. Many of those who these models probably assume would have purchased anyway might not have given the perceived risk that the credit partially neutralized. Meanwhile, 360,000 modifications have been started, many of which may end up re-defaulting. So at the very least the credit was as effective at reducing housing inventory. But at $8,000 a pop, it did so for cheaper than modifications which cost around $9,375 each.

I am probably as sympathetic towards Congress cutting spending as just about anyone. But if there's anything that it should be spending money on right now, it's taking action to ensure that the economy makes a recovery and does not dip back into recession during 2010. Stabilizing the housing market is essential to that end, and extending the credit for first-time home buyers will help to accomplish that task better than any other alternative that I can think of.