President Obama approved the expansion and extension of the homebuyer tax credit initially included as part of the economic stimulus package and set to expire at the end of November. While this move is intended to spur home sales, many experts argue that extending the tax credit is bad policy.
Ted Gayer, senior fellow and co-director of Economic Studies at Brookings, says the credit is a poorly targeted subsidy that is very expensive on a per new home sale basis, and adds to the deficit. Additionally, he argues that the tax credit helps turn renters into buyers and fails to address the main problem of an excess supply of houses, which may contribute to worsening conditions in the rental market.
Ted Gayer and Politico Senior Editor Fred Barbash answered your questions about the homebuyer tax credit in a live web chat. The transcript of this chat follows.
12:29 Fred Barbash: Welcome everyone. Today we have Ted Gayer, co-director of the Economic Studies program at Brookings, with us to answer your questions about the homebuyer tax credit. Thanks for joining us, Ted.
12:29 Ted Gayer: Hi Fred. Thanks for having me here today.
12:29 [Comment From Jason:] Can you briefly explain why you think the expansion of the homebuyer tax credit is a bad idea?
12:31 Ted Gayer: I have two main objections to the tax credit. First, it is very poorly targeted. So we wind up spending a lot of taxpayer money for not many additional home sales. Second, I don't think spurring housing sales gets at the underlying problem with our housing market -- which is that we have an excess supply of homes.
12:31 [Comment From Rebecca: ] You note in a blog post that the tax credit does not address the overall problem of the excess inventory of houses. While the tax credit may be missing the larger problem, won’t it positively impact some individuals who otherwise would not be in the market for purchasing a home?
12:33 Ted Gayer: I think it's important to get at this issue of the excess inventory of homes. If the program is primarily reshuffling households -- for example by turning some renters into buyers -- then we are still left with the same amount of empty homes, and thus still have a soft housing market. Having said that, like any tax credit, those who receive it are positively impacted. But tax credits are not a free lunch -- taxpayers must fund all expenditures.
12:33 [Comment From Suzanne: ] Does this program compare to the Cash for Clunkers program? Do you also think that was a bad idea too?
12:35 Ted Gayer: I think it has some similarities to Cash for Clunkers. Both are tax subsidies that in large part try to pull future sales forward to today. Both also have the problem of being poorly targeted -- that is, much of the expenditure goes to people who would have bought anyway (probably moreso for the homebuyer tax credit). Cash for Clunkers is different in that it required the destruction of the existing car, which isn't the case for the tax credit.
12:36 Ted Gayer: As a follow up comment, I think the destruction of existing vehicles was a bad thing because it was wealth destruction.
12:37 [Comment From James: ] I'm in my mid-twenties and am hoping to buy a home in the next couple of years. Should I let availability of the tax credit influence my decision to buy or continue renting? I'm wondering whether or not it's really that great of an incentive.
12:38 Ted Gayer: I've had a number of people ask me whether or not to take the credit, understanding my opposition. I think $8,000 no doubt will influence some people to enter the housing market. I don't agree with the policy goal, but by all means I don't expect people to pass up the offer.
12:40 Ted Gayer: Just as a quick follow-up, while the credit does provide an incentive for a renter to buy, I do worry that it will incentivize high-risk people into the market. In fact, one of the possible unintended consequences of the tax credit is that some people monetized it to get into a government-subsidized FHA loan, and these people might be at higher risk of defaulting. We don't want our long-run policies to return to promoting home ownership (or home-borrowership) at all costs.
12:40 [Comment From Yan: ] i'm not quite sure I understand what you mean by "the tax credit is poorly targeted." Can you explain?
12:42 Ted Gayer: Sure. Take this optimistic assessment from the National Association of Realtors (http://www.realtor.org/press_room/news_releases/2009/09/record_roll), which says that of the 1.8 to 2.0 million buyers who received the subsidy, only 350,000 are additional sales. The rest would have bought a home anyway, so the taxpayer transferred $8,000 to them for no change in behavior. My estimates (http://www.brookings.edu/opinions/2009/1009_homebuyer_gayer.aspx) are even lose rosy, suggesting we are paying about $200,000 in tax payments per additional sale achieved.
12:43 [Comment From Travis: ] I agree with you, Ted. I think it's policies like these that got us into so much trouble in the first place. If people can't afford to buy a house, then they can't afford to buy a house.
12:44 Ted Gayer: Thanks, Travis. I think you hit on a key point. Right now there are a number of government programs in place to support our weak housing market. I'm not advocating for pulling all of these suddenly. But we don't want to return to the set of policies which promoted homeownership, even for those who couldn't sustain a mortgage should the housing market depreciate. I worry that right now we are trying to sustain a mini-bubble in housing through various government programs. Ultimately, the housing market will have to correct and the stand on its own feet.
12:45 [Comment From Paula: ] So you're telling me that if I meet the financial requirements and I buy my first home before this thing expires, the government will cut me a check for at least $8,000?? That seems way too good to be true. What's the catch?
12:47 Ted Gayer: There's no catch, other than an income requirement (you must make less than $125k if single and $225k if couple). The bill that was just passed would also provide $6,500 tax credits for existing homeowners who buy a new house, so long as they lived in their current house for 5 consecutive years out of the last 8 years.
12:48 Ted Gayer: Also, there is a requirement that you not move from the house you purchase within the next 3 years. Otherwise, you have to pay back the credit to the government. I worry that this will be difficult for the IRS to monitor and enforce, which would suggest that the scoring of the bill was too high.
12:49 Ted Gayer: One more point on the new credit for existing homeowners. This really highlights my problem with the goal of the program. Someone flipping a house does not help the excess inventory of homes. At least with the first-time credit, we should expect some additional household formation. Not so with the existing homeowner credit.
12:49 [Comment From Justin: ] Why is the government even in the business of promoting homeownership over renting? Why do they think homeownership is such a good idea for everyone? I think it would be much more important to make sure homeless people get assistance to get housing.
12:52 Ted Gayer: Good point. Economists like me have been down on the mortgage interest deduction in our tax code, which promotes borrowing (especially for high earners) to buy a home. There seems to be a long tradition that buying a home is part of the American dream (I wonder if it's unique to the US?). There is nothing wrong with renting.
12:53 [Comment From Grant: ] Honestly, it seems that Republicans and Democrats are both equally guilty here. This pandering to the real estate industry, the $250 checks pandering to seniors, etc. etc. Why is there only partisan agreement when the goodies are being handed out?
12:53 Ted Gayer: Good point. I think the Senate vote was unanimous for extending the tax credit.
12:54 [Comment From Eric: ] What kind of impact has the tax credit had on the rental market?
12:55 Ted Gayer: This gets at my issue with the policy goal of turning renters into buyers. An unintended consequence of this goal is that the rental market will suffer. According to BLS (http://www.bls.gov/news.release/cpi.nr0.htm), owners' equivalent rent declined in September for the first time since 1992.
12:56 [Comment From Gary: ] You say there is nothing wrong with renting, but there are no tax advantages to doing so, should that change?
12:58 Ted Gayer: The tax advantages to buying should be reduced. To take just one example, the 2005 President's Advisory Panel on Federal Tax Reform (http://govinfo.library.unt.edu/taxreformpanel/) suggested changing the mortgage interest deduction to a credit equal to 15% of mortgage interest paid.
12:59 [Comment From Erin: ] Can we expect the number of foreclosures to stabilize this year? Or will they remain high?
1:02 Ted Gayer: This is the big question right now. Home prices have started to increase since early summer (http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_102706.pdf). However, there is a great amount of uncertainty about whether there is a flood of distressed properties soon to enter the market (which would depress prices). To take just one example, the Treasury program to prevent foreclosures announced yesterday (http://www.financialstability.gov/latest/tg_11102009.html) that 650,000 loan modifications have been started on a trial basis. But it is an open (and important) question of how many of these trial modifications will become permanent rather than ultimately heading to foreclosure.
1:03 [Comment From Chad: ] What policy alternatives to the Homebuyer Tax Credit should Congress and the President have considered that would have had greater and more targeted impact?
1:06 Ted Gayer: Great question. We should keep in mind that there are a number of policies in place right now to support the housing market. To take one example, the Federal Reserve is purchasing mortgage-backed securities from Fannie and Freddie, which helps to keep mortgage interest rates low. I don't think we should pull the breaks on all government support of housing, but I do think we will ultimately need to decrease government housing incentives. I think the tax credit is a good place to start (unfortunately, Congress didn't agree).
1:06 [Comment From Gary: ] How do you think President Obama’s extension of the credit will impact the real estate industry?
1:08 Ted Gayer: No doubt the real estate industry stands to gain from the tax credit. A subsidy to consumers always helps the producers of the subsidized good. But, again, I think we should be cautious about confusing economic activity with economic improvement. A program that largely re-shuffles houses (between homeowners or from renters to buyers) will generate lots of activity, but will not help housing fundamentals.
1:10 [Comment From Emily: ] How many Americans will qualify for the existing home owner credit?
1:13 Ted Gayer: I don't know exactly. In a back-of-the-envelope estimate I did of a previously proposed tax credit (http://www.brookings.edu/opinions/2009/1014_home_tax_credit_gayer.aspx), I estimated that about 2.8 million will qualify, but fewer than 100k would be additional (i.e., people who would not have bought a home anyway). Another rough way to compute this is to look at the JCT scoring of the bill that just passed. JCT scores the first two year of the tax credit at about $12.7 billion. If you assume $8,000 per recipient (which is a high estimate), then you get about 1.6 million recipients. (This is rough math on the fly, so don't hold me to it!)
1:13 [Comment From Kenneth: ] Does your answer to Gary mean that the credit doesn't help the housing surplus come down?
1:16 Ted Gayer: Yes. It might help a bit, to the extent that it promotes some household formation. But by in large, I don't expect it to absorb much of the excess inventory.
1:16 [Comment From Justin: ] Do you see them extending the homebuyer tax credit event further in the future?
1:18 Ted Gayer: I do worry about the tendency of temporary programs being extended indefinitely. When the original tax credit expired, many advocates pointed to the likely drop in home sales that would result if the credit wasn't extended. Of course, any temporary subsidy will draw sales from the future, so we should expect a drop-off, no matter when it expires. Having said that, I heard a number of the promoters of the extension say this was the last extension. We'll see!
1:18 [Comment From Matthew: ] With Cash for Clunkers, the homebuyer tax credit, and checks for seniors who's next? Will there be any checks specifically for 30 year-old, married, white, males with 2 kids? I could really use a couple extra bucks...
1:19 Ted Gayer: Call your Representative! (Or, on second thought, don't!) ;)
1:20 [Comment From A.J: ] It seems like the government's cutting a lot of people a lot of checks these days. Where the heck is all this money coming from?
1:23 Ted Gayer: While there's definitely a role for fiscal support during a weak economy, I share your concern about where this money will come from. Tax expenditures are not a free lunch. Everything spent on these programs will ultimately have to be paid for later through higher taxes. And we do need to be wary about our long-term fiscal situation. It is with this eye toward our long-term fiscal problems that I thought it a good idea to allow the tax credit to expire.
1:24 [Comment From Jeanne: ] What do you think the odds are for tax reform sometime during Obama's term? It seems to me that the tax code is riddled with loopholes.
1:25 Ted Gayer: I think we are very much in need of tax reform, and have been so for a long time. But I don't think the prospects are good for reform soon. Here's a good summary of where things stand: http://taxvox.taxpolicycenter.org/blog/_archives/2009/11/10/4377094.html
1:27 Ted Gayer: Just as a quick follow-up to Jeanne. The link I sent noted that tax reform is very difficult without violating the President's pledge not to raise taxes on the bottom 95 percent of earners. So long as this condition is in place, we won't be able to have broad-based tax reform.
1:27 Fred Barbash: That's about all the time we have for today. Thanks for all your great questions, and sorry we couldn't get to more of them. And thanks for your time, Ted - this was very informative.
1:28 Ted Gayer: Thanks, Fred. And thanks to everyone for submitting terrific questions. This was my first web chat. I hope to do it again!