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Is the Housing Tax Credit a Rip-Off?

This morning's Express had a spread on the D.C. real estate market arguing new buyers are -- and should be -- flooding in to take advantage of the $8,000 tax credit that expires Dec. 1. "We expect a condo frenzy in the next couple of months as people try for that credit," said realtor Andrea Evans, who's paid to expect such things.

But if such a thing happens, then it seems that the smart move would be to wait until January 1st, when those buyers leave the market and prices slacken. Put another way: Are these credits actually good deals for buyers? If they work in stimulating demand, they'd presumably push prices up by more than $8,000 by bringing more buyers into the market. And given that much of the behavioral economics literature suggests people lose their minds when they think they're getting something for free, you could easily imagine people taking worse deals in an effort to grab the credit. All of this is good from a macroeconomic standpoint, as the point is to help out the broader economy, but is there an economic consensus on whether these policies are good for buyers?

Update: Dave Roberts pulls together some data in California suggesting that the tax credit is indeed being consumed by the increased demand. "I think we can all be glad for a return of a real housing market that supports regular homeowners being able to sell their homes," he says. "On the other hand, I think I'm going to miss the days when I could find affordable homes for everyone with a job, decent credit, and a pulse."

By Ezra Klein  |  August 28, 2009; 10:17 AM ET
Categories:  Housing Crisis , Solutions , Taxes  
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Comments

I've heard anecdotal evidence (at calculatedriskblog.com) that dealers for cash for clunkers giveaway increased their 'list prices' by the the amount of the government payment (or more). People bought the cars because it was a great deal, even though they saved nothing.

Posted by: JimPortlandOR | August 28, 2009 10:43 AM | Report abuse

My son is trying to buy a house in the Inland Empire area of Southern California, and I don't think prices are being raised by that amount - but what I do see is that banks are holding back on releasing REOs.
It's rare, looking through the listings, to find a house for sale in that area tht ISN'T a short sale or REO. The number of "new" houses on the market has dropped sharply over the last month plus, yet the bank inventory of REOs hasn't really dropped as the foreclosure rate stays high.

Posted by: mmsoar | August 28, 2009 10:57 AM | Report abuse

Ezra, you say: "All of this is good from a macroeconomic standpoint, as the point is to help out the broader economy." I'm not sure that's true. If the credit only applies to new construction, then yeah, the credit is then promoting construction and jobs and recovery. (Ignoring the ecological harm of yet more suburbanization and, in Herman Daly's terminology, "uneconomic growth.") But if the credit applies to existing housing, how is that promoting recovery of any meaningful--i.e., job creating--sort? Then you're just subsidizing transfers, not new production or creation of new value. Yes, you liberate some people to move and be a smidge more free in the labor market, but I don't put a lot of stock in that having a major effect.

Posted by: JonathanTE | August 28, 2009 11:41 AM | Report abuse

Econ 101 says that such a credit will subsidize sellers at 100%. Let me repeat: the economic consensus is that 100% gets consumed by higher prices. The economicn consesnsus expects and the data show similar results for the mortgage interest tax deduction and for "employer-paid" payroll taxes.

Subsidizing sellers temporarily is not the worst idea in the world, though on balance I would be against it. However, there is absolutely no mystery here. None whatever. "Buyer" tax credits go 100% to sellers in the for of higher prices, just like "employer" taxes get paid 100% by employees in the form of lower wages.

Posted by: wcwhiner | August 28, 2009 11:44 AM | Report abuse

wcwhiner, you forgot the part in Econ 101 about elasticity.

Posted by: constans | August 28, 2009 11:55 AM | Report abuse

The same arguments can be made against the cash-for-clunkers program. The housing credit is essentially moving some future sales into this year.

Posted by: tomtildrum | August 28, 2009 11:57 AM | Report abuse

Did I? There aren't (and honestly, can't ever be here even when the data eventually are available) careful studies of this particular credit, but there are careful studies of the other two examples I cited. By all means, dig through the literature.

Posted by: wcwhiner | August 28, 2009 11:59 AM | Report abuse

*The housing credit is essentially moving some future sales into this year. *

To a degree, that's the point: to stimulate things now to head off a vicious cycle and perhaps promote a virtuous cycle.

It does seem that the low-end of the housing market has stabilized. Also, notably, not everyone qualifies for the housing credit.

And, yes, wcwhiner, you did forget about elasticity of supply and demand, which will cause incentives and employer taxes to have effects that are less simple than you assume them to be.

Posted by: constans | August 28, 2009 12:10 PM | Report abuse

In my view, the housing credit is a rip-off, and a cheap way for Congress to claim to be doing something when they're really just running up the deficit for future taxpayers, such as you and me.

Posted by: Dellis2 | August 28, 2009 1:07 PM | Report abuse

constans, in an Econ 101 model an employer tax is shifted 100% onto wages. Careful empirical studies peg the actual shift at around 90%. The real world in this case is indeed very nearly as simple as the Econ 101 model assumes.

Posted by: wcwhiner | August 28, 2009 1:28 PM | Report abuse

You're especially crazy to rush if you're buying in DC. DC has a first-time home-buyer credit of $5000 for people who DON'T claim the federal credit. DC's credit has been around for years, and won't be expiring any time soon.

Posted by: tomveiltomveil | August 28, 2009 2:42 PM | Report abuse

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