More Stupid Housing Policy on the Way?
Great news! My house goes on the market today — at the same price the house next door sold as a foreclosure a few years ago.
Okay — it’s mostly good news insofar as I don’t have to drive back to Ann Arbor every weekend and instead can start enjoying the beauty of west Michigan.
But being in the housing market at its bleakest moment does mean I’m following news closely. Like this story, suggesting the Administration may bring back the housing tax credit.
The Obama administration has not decided whether it should resurrect a popular tax credit for first-time homebuyers, Housing and Urban Development Secretary Shaun Donovan said on Sunday.”It’s too early to say whether the tax credit will be revived,” Donovan said in an interview on CNN’s “State of the Union” program. He said the administration would “do everything we can” to stabilize the shaky U.S. housing market.
Now, policy wonks of all political persuasions have agreed since last year that it was always a stupid policy (and note, this is from before it was extended to more buyers).
“It’s terrible policy,” says Mark Calabria of the libertarian Cato Institute.
“It’s awful policy,” says Andrew Jakabovics, associate director for housing and economics at the liberal Center for American Progress. “It’s incredibly expensive. It’s not well targeted.”
Home sales have risen dramatically in the past year, but most economists don’t attribute the increase to the tax credit. August single-family-home sales in Southern Nevada, for instance, hit 3,229, up more than 25 percent from a year earlier.
But economists attribute most of the rising sales to the plunge in prices, not the tax credit. The median sale price of single-family homes was off more than 35 percent from a year earlier.
“A heck of a lot of people would have bought the house anyway,” says Ted Gayer, an economist at the Brookings Institution.
According to an estimate by the National Association of Realtors, of the 2 million new homebuyers since the credit was instituted, 350,000 say they would not have bought a house without the tax break.
“We paid $8,000 to at least 1.5 million people to do something they were going to do anyway,” Jakabovics says.
The tax break, due to expire at the end of November, is on track to cost $15 billion, twice what Congress had planned. In other words, it will cost $43,000 for every new homebuyer who would not have bought a house without the tax break.
Unlike Cash for Clunkers, there was no societal benefit tied to the credit (however ineffective C4C was at saving gas). Moreover, the benefit was small enough — given the cost of a house — that it wasn’t helping all that many marginal buyers get into a new home.
More importantly, as Calculated Risk notes (and has been noting, for over a year), the credit doesn’t affect the underlying problem in the housing market: too few households and therefore too much supply.
The problem in housing is there is too much supply (at the current price). Incentivizing people to buy existing homes just shuffles households around — it does NOT reduce the overall supply unless the buyer is moving out of their parent’s basement. I doubt that happened very often. Note: It is important to remember that rental units are part of the overall supply, so moving people from a rental unit to homeownership doesn’t help.
And if the tax credit leads to more new home sales — that ADDS to the excess supply. And that makes the situation WORSE.
It would be far better for housing and the economy to announce “There will be no further housing tax credits.”
But, a tax credit is a Republican policy championed by former realtor Johnny Isakson (R-GA) which means it has the plus — in DC terms — of being hopey-changey bipartisan and of being celebrated as a tax cut for market behavior in DC’s twisted sense of morality. And so, we consider re-upping the tax credit.
And while HUD Secretary Shaun Donovan says the Administration would “do anything we can” to prop up the housing market, they seem to be ignoring the underlying causes of the problem. Read more →