Was Extending the Homebuyer Credit a Good Idea?

Some call the popular $8,000 tax credit a handout to the mortgage and real estate industries

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The Senate voted unanimously to extend an $8,000 tax credit for first-time homebuyers, expanding the program to include couples with income up to $225,000 a year. This popular program was set to expire at the end of the month, and was renewed as part of a larger stimulus package. But why do many commentators think it's a fairly bad idea--a waste of money at best or harmful at worst? Critics argue it's inefficient stimulus, fuel for needless home construction, and a handout to the real estate industry.

  • Wasteful Handout to Mortgage Giants, writes the editorial board of the New York Times. "This costly giveaway to the real estate and mortgage industry will spend far more in taxpayers' dollars than it can ever deliver in economic benefit. As happened with the cash-for-clunkers program in the automobile industry, the program will make housing look momentarily better but is unlikely to contribute to long-term recovery...the new tax credit appeals primarily to affluent voters who do not need the government's help buying property. And encouraging buyers to leave one house for another does nothing to reduce the glut of homes on the market, which is an important factor driving down housing prices. Finally, the tax credit does nothing about the central housing problem, which is foreclosure."
  • Cash Going the Wrong Places  For starters, say economics bloggers Simon Johnson and James Kwak, "[s]een purely as a stimulus, the tax credit is highly inefficient." Analysis puts the credit at an average $43,000 for each house sold, but "the $43,000 is not being invested; it isn't buying anything for the public, like a new road." Instead, "[i]t's just cash going into people's pockets"--while that can be a good thing, it would be much better, they argue in the Washington Post, to "take the same cash and hire more teachers, police officers or soldiers to fight in Afghanistan. We would get more economic activity, and the government would get something for its money." Johnson and Kwak also point out that the tax credit doesn't "stabilize" the housing market so much as keep prices artificially inflated, and if the aim is to simply "boost the value of securities backed by residential mortgages and therefore help bolster the financial system," there are much easier ways of "recapitalizing banks."
  • Refuting Those Reasons  The Atlantic's own Daniel Indiviglio thinks these are "valid criticisms," but that they're not lethal to the idea of the tax credit. While the credit is an inefficient stimulus, so are most stimuli,  he says. Some of the teachers one could hire with Johnson's and Kwak's proposed government cash would have found jobs without that help. Besides, he says, "I think that the number of people who say they would have bought homes without the credit is highly exaggerated." He finds the idea that "the tax credit might overly stimulate the housing market ... a little hard to swallow," given the drop from previous price levels, but points out that if that's truly a concern, one could apply the tax credit only in specifically troubled housing markets.
  • Total Waste of Money  Mike Shedlock isn't so optimistic. He points to a Goldman Sachs study indicating the credits are a waste, and argues that "we have a huge inventory of homes already and we are creating incentives to build more." In fact, he thinks the reason the credit was extended was that "homebuilders padded the pockets of those voting for it with campaign contributions." His conclusion? "The whole thing reeks and the Senate knows it."
This article is from the archive of our partner The Wire.