Tax credit responses part II: Houses

A few commenters pointed out that I overplayed my hand when I claimed that the $8000 tax credit increases the purchasing power of first-time home buyers by “$100k or more”. They argue that although the $8000 credit does help with the down payment, it does not help with the cash flow; that is, it does not do anything to increase the monthly payment that a first-time buyer can afford.

Well… They are right. However, given that the $8000 tax credit is available to married couples with incomes up to $150k, and that mortgage rates are near all-time lows thanks to the Fed buying $1.25 trillion in MBS with printed money, I suspect that the down payment and not the cash flow is the limiting factor for many of the recipients of the tax credit. By OregonGuy’s numbers, an extra $40k to $80k in purchase price becomes an extra $215 to $430 in monthly payment. That is not huge compared to a $150k joint income.

I grant that “$100k or more” was an overstatement. But that changes only the raw numbers, not my conclusions, which are: 1) The tax credit is keeping prices artificially high at the low end. 2) The credit itself is going largely to sellers, not to buyers. 3) To the extent it does go to buyers, it is only by encouraging an increase in supply (especially banks off-loading foreclosures). 4) For buyers, the credit is more than offset by the higher debt burden they incur by buying an overpriced house. 5) The largest beneficiaries, by far, are the banks who are off-loading low-end foreclosure properties and issuing fresh loans. (Well, also the agents and brokers who make money off of sales volume.) 6) It is a good time to sell and a bad time to buy, unless maybe you qualify for the tax credit and are paying cash.

To these I will add: If the tax credit remains in effect for long enough, builders will respond by increasing production, just as they would with screwdrivers. This will only serve to increase the massive mis-allocation of resources caused by the housing bubble in the first place.

Another commenter calls my claims “complete crap” and asks for “evidence”. Let me make it clear that I am not claiming house prices “have risen” by $100k or even $50k. I am merely claiming they are higher than they would otherwise be by something like these amounts.

For evidence, let’s just say that I occasionally read Calculated Risk. Try here or here or here or here or today’s news here.

Or try Jim the Realtor. Here is a video where he shows a house that closed at the end of August for $280k — on a street where “nothing has sold for over $300k all year”. Then he shows a nearly identical house next door that just sold for $370k. Granted, this is merely an anecdote, but you know what they say about the plural of “anecdote”…

4 comments to Tax credit responses part II: Houses

  • snoopy

    Nemo was right!

    http://www.calculatedriskblog.com/2009/10/goldman-government-policies-boosted.html
    Based on Goldman’s estimates, the first-time home buyer tax credit probably cost around $80,000 per additional home sold. Ouch.

  • Ilargi

    Nemo, since I quoted you, please see:

    The greatest theft in American history

  • OregonGuy

    Nemo – Down-payments and cash flows aside, I agree with you that the tax credit is terrible idea. The focus on the value of housing stock is a financial bailout in a politically acceptable form. The American obsession with residential investment is a mistake – we need to focus on productive assets.

    Speaking of which, I need new tires on my car. I specified “Made in USA” as a requirement. This led to much head scratching and a drastic narrowing of choices, but it was still possible. Our kids probably won’t have the option to purchase American-made tires. I think we should all dread that possibility.

    Snoopy – I believe CR is calculating the cost of the tax credit as (total tax credit expense) / (houses sold – houses that would have sold without the tax credit). Note the Goldman Sachs analyst says the tax credit boosted prices by 5% – that’s probably roughly $10K in the entry-level US housing market.

  • Ilargi – I noticed the spike in traffic. Thanks.

    OregonGuy – The GS analysis referred to price increases in general. I suspect the difference at the low end is much higher. I concede it would be nice to have some actual data to back this up…

Leave a Reply