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More on the home buyer's tax credit

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I took some shots at the expansion of the home buyer's tax credit yesterday, but Steve Pearlstein really tees off in today's column. Good stuff.

But it doesn't answer one of the arguments that came up in the comment section yesterday, which is that the true stimulative impact of the tax credit is that it will help stretched new homeowners purchase rugs and shelves and televisions and furnishings. This is, I think, overblown. First, only a certain amount of this spending is discretionary. Fairly few people purchase a new place but decide against purchasing a couch after checking their bank statement. Those who do purchase a new place and find themselves too strapped for a couch probably shouldn't be buying a home anyway, and if the tax credit is giving them mental license to do so, it's probably a net negative.

Second, the question is whether this stimulus is better than other forms of stimulus. People purchasing a home in the current market are putting up fairly significant down payments, which suggests they're the type of people with assets, which means they're not, on average, the type of people living hand-to-mouth. That suggests they might be the kind of people who don't need to spend the windfall in the first place, and in fact are temperamentally inclined to deposit it, as they're savers by nature (that, after all, is how they got the down payment).

The corollary to that question is that though this might be less effective stimulus than, say, aid to states and localities, it might be more stimulus than the nothing that would actually be the alternative. At that point, you're getting into a pretty narrow question as to whether the cost to taxpayers outweighs the stimulative impact, and my hunch is that it does, but we don't really have the numbers needed to make that determination definitively.

Photo credit: Tony Dejak/AP.

By Ezra Klein  |  November 6, 2009; 11:48 AM ET
Categories:  Economic Policy  
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Comments

Many people are facing the dilemma of whether to buy a house now or to wait until later. Particularly when the housing market is in a deflationary spiral, there is an incentive to wait until later, because prices will only be lower. The intent of a *temporary* tax credit is to give people an incentive to move their buying plans up to the present so that they buy *now* to counteract the deflationary incentives to wait and, hopefully, stop the deflationary vicious cycle.

On the other hand, if it becomes a long-term policy/tax credit, then it's just another tax credit, like any other.

Posted by: constans | November 6, 2009 12:09 PM | Report abuse

--"[...] but we don't really have the numbers needed to make that determination definitively."--

You don't need "the numbers", Klein. It's simple economics. You can't rob Peter to pay Paul and wind up with a net plus. And if you do it often enough, Peter will eventually quit producing that which you wish to steal, or he'll find some other way to stop you in your amoral rounds.

Posted by: msoja | November 6, 2009 12:11 PM | Report abuse

I'd much rather see the money spent on infrastructure repair and upgrading, and sent to the states to save jobs, but you may be wrong about the furnishings. I bought my first and only house in 1986. I had a very substantial down, so could afford something nice with payments about 30% of my gross salary. But by the time it was time to move in, everything had cost so much that I felt very stretched and compromised on some furnishings and on refinishing the floor in one room. And some things were definitely postponed. Of course those were still inflationary times, so within a few years it was affordable, and I'm glad I stretched a bit. But people do make those kinds of decisions I'm sure. They certainly did when they were pretty sure that they'd have a job with more salary in a few years.

Posted by: Mimikatz | November 6, 2009 12:17 PM | Report abuse

*You can't rob Peter to pay Paul and wind up with a net plus*

You know, whenever we're discussing other kind of tax cuts, you argue that this is not really "spending" because cutting taxes just gives back the taxpayer's own money to begin with.

Unless, I suppose, you don't like the specific tax cut. Then you change your tune.

Posted by: constans | November 6, 2009 12:22 PM | Report abuse

All of this presumes we're living in normal times, which we are clearly not.

Rather than making choices of what type of stimulus when deflation is on the march like the Nazis coming across Europe, the government needs to get its arse in gear and sign on to an open ended commitment to aid states and local governments, homebuyer tax credits, cash for clunkers, and anything else we can do right now.

Or we're going to see 10.2% become 14%.

Posted by: zeppelin003 | November 6, 2009 12:26 PM | Report abuse

The buyer's credit is inflating the prices of houses rather than stabilizing them.

We don't have any money to spend...on anything. If we are going to go deeper into debt for the housing sector, wouldn't it be more responsible to invest in the "deed to lease" programs that enable people to stay in their homes and keep surplus inventory from deflating housing prices?

Posted by: Athena_news | November 6, 2009 12:32 PM | Report abuse

You do make assumptions, don't you? I bought two different houses, made significant investments in both, and didn't buy a new couch until 15 years having bough the first house.

Posted by: mainer2 | November 6, 2009 12:34 PM | Report abuse

Even if only a fraction of the house purchases are stimulated by the credit, that is a several hundred thousand dollar purchase stimulated by only a few thousand dollars, or a multiplier of maybe 10. So if one in ten purchases is stimulated that is an overall multiplier of 1, plus if any of the other tax credit is spent on furniture or additions or whatever, that brings it up even more. So as I see it, it can be very stimulative even if most of the houses would have been bought anyway. Same kind of argument applies to cash for clunkers.

Posted by: gaeblerj | November 6, 2009 12:35 PM | Report abuse

But it's a tax cut!
That's all you really need to know.

Posted by: PhD9 | November 6, 2009 12:41 PM | Report abuse

are you just bitter that other's are going to get a windfall like you did, making your decision to buy a place when you did look less wise?
you should be happy that home prices will stay inflated during the duration of the credit. also, the multiplier effects of reducing housing inventories are huge. this is a no-brainer move in the current climate.

Posted by: rt72 | November 6, 2009 12:48 PM | Report abuse

are you just bitter that others are going to get a windfall like you did for the foreseeable future, making your decision to buy a place when you did look less wise?
you should be happy that home prices will stay inflated during the duration of the credit. also, the multiplier effects of reducing housing inventories are huge. this is a no-brainer move in the current climate.

Posted by: rt72 | November 6, 2009 12:48 PM | Report abuse

" ... People purchasing a home in the current market are putting up fairly significant down payments, which suggests they're the type of people with assets, which means they're not, on average, the type of people living hand-to-mouth. ..."

Unfortunately this is not true. See an October 9 NYT article (which I am apparently not allowed to link) about how the idiot FHA is encouraging bad risks to buy houses and throwing away billions of dollars in the process.

Posted by: jbsjbs | November 6, 2009 12:50 PM | Report abuse

Deed-for-lease is such a great idea, I can't believe it wasn't implement months ago! Obviously it doesn't work for everyone in foreclosure, but every vacant property avoided helps.

As for the homebuyer credit: no, its not the perfect stimulus. But it is a stimulus that middle-class folks can take advantage of personally.

The whole idea of the stimulus *package* was that, since no concept was perfect, a whole array of things were tried. Some hit immediately, some take time, some (like the tax cut) were spread evenly over two years.

Some will work better than others, and we can choose to extend those that are best. I don't know if this homebuyer credit is the best, but in my book it is better than giving corporate fatcats tax breaks and hoping that they hire people. Yeah, that works. Not.

Posted by: mikenmidland | November 6, 2009 12:53 PM | Report abuse

I, for one, am going to happily use my first time homebuyers credit to by new furniture (including a couch). We tripled our square footage and need a good bit of furniture to fill it. The $8000 definitely made a difference in the houses we looked at, as we could look at it going towards improvements, furnishings, etc.

Posted by: mskidz | November 6, 2009 1:05 PM | Report abuse

--"Unless, I suppose, you don't like the specific tax cut. Then you change your tune."--

Tax cuts by themselves are worthless. Not until the government stops spending a significant proportion of the national wealth will the economy recover. And that's not likely to happen, but, markets have built in ways of correcting. Not pretty, but pretty effective.

Posted by: msoja | November 6, 2009 1:06 PM | Report abuse

Pearlstein gives it the treatment. I could have done without the intergenerational warfare bit. From my perspective I am selling my assets to the younger generation at 60 cents on the dollar so I'm not seeing how I am stealing from anyone.

There is a problem in that people are not "moving up" from "starter homes." (Though I never quite saw how 2500 square feet and a 3 car garage was a starter home though in 2005 it was). And I am not sure the $6500 is enough to convince any of my neighbors to move. It seems we all independently came to the conclusion that perhaps the best 10 year plan was no mortgage at all rather than a bigger mortgage on a bigger house. That's the problem right there, isn't it? We make rational decisions and now policymakers are throwing money at trying to make us make irrational decsions. I think the ones that will take advantage of $6500 (and if $6500 makes a difference to you on an $800,000 home purchase let me know your lenders name and I will start shorting their stock) are people who either are already moving or probably shouldn't move right now.

But politics is all about who gets what. And some people are getting right now but it's all good if we can get the economy going again I guess.

Posted by: luko | November 6, 2009 1:09 PM | Report abuse

--"I am selling my assets to the younger generation at 60 cents on the dollar so I'm not seeing how I am stealing from anyone."--

Are you giving that "younger generation" a choice in the matter? Or is it one of those offers that they can't refuse?

Posted by: msoja | November 6, 2009 1:27 PM | Report abuse

Well, excuse me, Snarky McGlib. FHA is one of the few active mortgage insurers at the moment, and many of those using FHA are only putting down 3%. Not to mention that many of these buyers are not making purchases in high-cost urban areas, but places (like my hometown in Iowa) where $100K can buy you a hell of a nice house.

And the idea that if you're "too strapped for a couch" you have no business buying a house is offensive in the extreme. Aside from the majority of homebuyers who do not choose to discard all of their belongings in favor of entirely re-furnishing their new homes, that $100K in Iowa comes with a $3K FHA down payment, which is less than anything at Design Within Reach.

I completely agree that this program is bad stimulus, but that doesn't give me - or you - license to speak of people who've taken advantage of the program as selfish, irresponsible hicks. You can defend your position without being so excrutiatingly superior.

Posted by: jamois | November 6, 2009 3:17 PM | Report abuse

"Many people are facing the dilemma of whether to buy a house now or to wait until later. Particularly when the housing market is in a deflationary spiral, there is an incentive to wait until later, because prices will only be lower. The intent of a *temporary* tax credit is to give people an incentive to move their buying plans up to the present so that they buy *now* to counteract the deflationary incentives to wait and, hopefully, stop the deflationary vicious cycle."

Bingo. That's still the rough logic in many Congressional minds I bet.

...

It wasn't that long ago that Congress was repeating the bank-lobby-fed line that "we have to do something about declining house prices", etc.

I must have read or heard that about 20-25 times from members of Congress in the media.

Of course, declining house prices are a necessary correction, and a chance for the housing sector to re-balance and begin to recover and begin to add to growth at some point.

But psychology is huge for the economy. And stopping the downward house price slide a bit early, even temporarily, or until inflation hides it, will be a psychological boost, which is a real boost to the general economy.

As for the amusing idea that people won't spend the $8000. You bet they will.

People have lost jobs. Many will have to relocate.

To be exacting and precise, some will spend the $8000 quickly, while others will spend some extra money now and also pay down credit cards, and thus feel less in debt, and thus cut their ordinary monthly discretionary spending by a smaller cut than they would have, over time, etc. They'll eat out a bit more, etc.

And a few more waitresses will earn enough tips to be able to take their kids to the dentist, etc.

The 0% circa-2008 homebuying "credit" is in some ways similar to one proposal I put forward as a type of backup plan for emergency stimulus (if a depressionary slide accelerated).

Since consumer debt is part of why this recession is so deep, one type of emergency stimulus would be a debt-refinance credit to be used against credit card or other consumer debt. Essentially to refi consumer credit into a 0% 15-year loan similar to the circa-2008 FTHB "credit". The idea was to have a psychological relief where the debt-deflation spriral would be weakened.

Posted by: HalHorvath | November 6, 2009 4:24 PM | Report abuse

I can't believe the nonsense I am reading here. I can't believe there is actually debate about whether the house flipping subsidy can be justified by any stretch of argument. It cannot except as another device of class warfare (that is, if you are a fan of class warfare). Do any of the tax break defenders realize that money given away to a few must have been collected from the many? More and more you get the impression that Americans are really nutcases escaped from an asylum, and not just the rightwingers but all of them. None of you even asks the obvious question "who really gets the money".

Ezra's final paragraph is quite the hit. By your logic, you'd also have to applaud the Bush tax cuts for their greater then zero "stimulus" effect.

Posted by: carbonneutral | November 6, 2009 7:07 PM | Report abuse

--"I can't believe the nonsense I am reading here."--

Believe it. Klein's place is nonsense central.

Posted by: msoja | November 6, 2009 9:26 PM | Report abuse

"Believe it. Klein's place is nonsense central."

Not least thanks to your contributions.

Posted by: carbonneutral | November 9, 2009 2:24 PM | Report abuse

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