Please turn on JavaScript

Brooks Wilson's Economics Blog: Glaeser on the Home Buyers' Tax Credit

Friday, November 13, 2009

Glaeser on the Home Buyers' Tax Credit

Edward Glaeser, described the bad incentives created by the Home Buyers' Tax Credit in "Attack of the Home Buyers' Tax Credit," written for the New York Times.  Glaeser creatively applies economic tools to problems.  
One reason to fret about federal anti-recessionary fixes is that they often last long after the crisis that justified their creation.

According to Case-Shiller data, housing prices have been rising since May, yet Congress has just extended and expanded last year’s home buyers’ tax credit. They’ve made the program more regressive by upping the income limit for families from $150,000 to $225,000.

Even more problematically, the new, but definitely not improved, tax credit now offers up to $6,500 to current homeowners who have lived in their houses for at least five of the last eight years and buy new homes.

Who but a real estate agent could love this policy?...
Certainly, extending the tax credit to current owners doesn’t increase homeownership. I believe that our government bears some responsibility for the housing bubble because it encouraged Americans to leverage themselves to the hilt to buy homes. But just because I’d like to do less to encourage homeownership doesn’t lead me to favor more handouts that don’t increase homeownership.

A buyers’ credit that goes to everyone creates a strong incentive for purely mindless house swapping. If my cousin and I sell our houses this year, and then move back three years later, we can make $13,000. In some such transactions, people may decide to flout the law and continue to live in their old houses, pocketing quick money for a sham deal...

It subsidizes existing owners to trade up or down, which implicitly encourages people to pull up roots and sever their connections with their existing community. If you ever thought that encouraging civic engagement through housing policy was a good thing, then the current policy will push in exactly the opposite direction.

There is also no reason to think that a tax credit that encourages house-trading among current owners will help the overall housing market. A subsidy for existing homeowners provides an equal incentive for buying and selling. There will be no net decrease in the vacant housing inventory; basic economics suggests that any policy that provides equal incentives to buy and sell will do little to increase housing prices.

Increasing the scope of the program will also significantly increase its cost.

Recently, first-time home buyers have been accounting for close to one-half of home purchases, but before the tax credit particularly subsidized new home buyers, their share was lower. In 2006, only 36 percent of home purchases were first-time buyers, and a tax credit for existing owners will surely move us in that direction. If 40 percent of future transactions involve existing owners who can take advantage of the benefit, then giving the tax credit to existing homeowners could easily burn through $5 billion in five months.

The best thing about extending the home buyers’ tax credit is that it does at least have an expiration date; it is currently set to end in May 2010. Unfortunately, the events of the last week lead me to suspect that the tax credit will continue to exist, like a B-movie zombie, long after it should have settled in its grave.

1 comment:

  1. Elyse Doughty14/11/09 9:20 PM

    It seems that the government is more interested in promoting home ownership than insuring that people receive vital medical care. Home ownership is not a necessity. Food, shelter, and medical care are necessities - these should be the priority of government spending.