Renewing the Home Buyer Credit

The Central - West Hartford CenterWe’ve received a lot of questions recently about the soon-to-expire First Time Home Buyer’s Credit. Since the time has basically passed to be able to take advantage of it in a home purchase, the discussion has shifted to the future of the program. Analysts and commentators around the country are weighing in on the subject, dividing into two camps.

Camp 1: Extend the credit, and perhaps even expand it to all buyers and with larger credit amounts. Their basic contention is that the program is instrumental to stabilizing the fragile housing market, and that real estate will grind to a halt without the credit. The National Association of Realtors (NAR) has taken a leadership role in advocating this position, and has issued this Call to Action to their Membership in addition to their direct efforts in Washington.

Camp 2: End the program and allow the markets to rebalance on their own. This group feels that the credit is a poor use of taxpayer money and extends a credit/housing bubble which keeps home prices artificially expensive versus income levels. Numerous economists of all political leanings have taken this side of the debate. Economist Barry Ritholtz, author of The Big Picture Blog has been writing about the subject regularly and most recently posted a piece titled Why Expanding the Home Buyer’s Credit is a Mistake that summarizes the position and links to others in the same camp.

Our position is more sympathetic to the second group than the first. The real estate markets in Greater Hartford don’t seem to be locked up, and the tax credit doesn’t seem to be a critical consideration. Our experience has been that capturing the tax credit is nice, but it is not the key factor that motivates buyers to purchase their first home. We have worked with many buyers over the course of the year that have qualified for the credit. Some have accelerated their search to be sure to close in time, while others are going to miss out because the right house for them is not available. We have not worked with anyone who is buying solely because of the credit.

In addition to observations about the use of the credit among our clients, we also tend to side with the economists on the theoretical arguments about the credit. Our main issue is that the most of the buyers claiming the credit would have purchased a home anyway. NAR did a study finding that “about 1.8 to 2.0 million first-time buyers will take advantage of the $8,000 tax credit this year, with approximately 350,000 additional sales that would not have taken place without the credit.” They are using this data to support their contention that the credit helped the markets. However, it seems to us that the government paid the credit to at least:

1,800,000 – 350,000 = 1,450,000

buyers that would have purchased anyway, which is more than 80% of the total people that received it. So that comes out to at least:

1,450,000 * $8,000 = $11,600,000,000 ($11.6 billion)

of our tax dollars that could have been spent elsewhere, or not spent at all. Perhaps that’s not much when the annual deficit is in the trillions, but $11 billion seems like a lot of money.

We’d like to see a more honest discussion over the credit’s goals as the powers-that-be debate its extension. The data shows that the program is more about broadly supporting the lower end of the housing market than it is about convincing non-owners of the virtues of homeownership. Perhaps the housing market, like other industries, is “Too Big To Fail” and should be bailed out since it impacts such a large percentage of the US population. Or perhaps the government needs to take a step back and start allowing people who make poor investment decisions to lose their money, both on Wall Street and on Main Street. Either way, this is the debate we should be having as a nation as our representatives consider extending and expanding the government’s role in the housing market.