The secretary of the Department of Housing and Urban Development (HUD) appears
unexcited about extending the first-time home buyer tax credit:
The nation’s top housing official expressed doubt over the need to extend the $8,000 tax credit for first-time home buyers, and said that the Obama administration was reviewing whether the additional cost of extending the credit was worth any benefit in home sales.
Shaun Donovan, the secretary of the Department of Housing and Urban Development, told a Senate hearing on Tuesday that there was “clear evidence” that the tax credit had benefited the housing market. But he said that the “real issue” in considering an extension was whether an extension was worth the cost to the government in lost tax revenue.
Note that Calculated Risk estimates that the first-time home buyer tax credit costs about
$43,000 for every extra home sold:
Here is the math: 1.9 million buyers qualify for the credit (the NAR estimates between 1.8 and 2.0 million) = $15.2 billion.
The NAR estimates the tax credit resulted in 350 thousand additional purchases. So divide $15.2 billion by 350 thousand = $43,000 per additional home. And the numbers will get worse if the program is extended.
The credit also appears to be
vulnerable to tax fraud:
The Internal Revenue Service is examining more than 100,000 suspicious claims for the first-time home-buyer tax break, another sign of potential trouble for the soon-to-expire program.
It's a waste of money, poor economics, and vulnerable to tax fraud, so of course Congress will renew it.
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It's great how the tax credit is officially deemed to have "benefited" the housing market. Notice how the government and the media invariably describe the state of the housing market with such phrases as, "this is the worst housing market in living memory," "the market is expected to improve," etc.
ReplyDeleteThey describe the state of the market with terms that connote "good" or "bad" value judgements. However, we must ask, good or bad for whom?
By the government's and the media's thinking, a "good" market is good for banks, taxing entities, the REIC, and most senior citizens or people looking to downsize. However, they ignore the fact that their "good" market is bad for young people, minorities, first time homebuyers, and industries that could benefit from the money that is diverted into housing.
Clearly, the governemnt and the media are wrong to suggest that the market is absolutely "good" or absolutely "bad" for its participants depending on prevaling price and transaction volume. Rather, it goodness or badness is relative; e.g., what is good for the buyer is bad for the seller.
I recommend that a determination of whether the market is "good" or "bad" not be made based on the benefit that various groups may derrive from it. Rather, a "good" market is one in which real estate is CORRECTLY valued (i.e. sustainable and not manipulated by the government), and in which transaction costs are minimalized.
Under this standard, the tax credit worsened the housing market because it manipulated the cost of housing to support it at an unsustainable level and it increased the transaction costs.
Fantastic! You made my day. Let's hope this good sense rubs off on enough of the rest of Washington to kill this extension.
ReplyDeleteI don't have an opinion on the tax credit, but I just have to say the math from Calculated Risk is terribly flawed and completely disingenuous.
ReplyDeleteLets see, I have a budget to by 10 bananas at $1 each. If I decide to buy only 2, that does not mean I have spent $5 per banana.
Bogus. I call BS on that nonsense.
Whats bogus? Let's say you gave me $10 to help me buy 10 $1 bananas and I ALREADY HAD 8 bananas--I go buy 2 more and pocket the $8 and spend it on a pint of booze.
ReplyDeleteThen your $10 netted an increase of 2 bananas, thus $5 a pop. Sure I got a bottle of booze out of it, but that wasnt what you gave me the money for, was it??
If you disregard the purpose of the tax credit--to spur ADDITIONAL home sale transactions--then we might as well just retroactively give the tax credit to anyone who has bought a house in the last 2 years. A thank you for being a market participant
Anon from 10:16 AM, your analogy is incorrect. The correct analogy would be that you have a banana budget of $10 which you use to buy 10 bananas and then proceed to only eat 2 of them. You did indeed spend $5 per banana consumed then. Similarly, with the tax credit, the "benefit" is only in the additional sales that were generated, but us taxpayers are paying for all of the sales, not just additional sales, and so the cost is on all sales. Look at it this way: if the tax credit had generated exactly 1 additional sale and 999 other people who also bought would have bought then anyway, we will have spent $8K * 1000 = $8M to generate that one additional sale. It would be obviously wrong to say that the cost was a mere $8,000 in that case.
ReplyDeleteIts me again from 10:16. Its wrong that the government sets aside $8K for EVERY single eligible home buyer and that the money is gone the moment that happens. Its a presumption that is completely fabricated to make up the $43K number.
ReplyDeleteonce again huh? Are you trying to say that the government is going to make a determination as to whether each eligible buyer was spurred by the credit in order for them to get it? Like a survey or something? Or are you saying that there are eligible buyers who A) dont know about it and wont claim it or B) know about it but will turn it down? None of the above is likely and thus almost all eligible buyers will get the credit regardless of whether they were already going to buy or not. A giveaway.
ReplyDeleteanon 10:16, I think you're not properly analyzing this problem
ReplyDeleteThe goal was to create sales. The estimates are that 350,000 sales were created that otherwise would not have with the credit. 2 million people will be getting the credit, the vast majority of whom would have bought without this taxpayer-funded bribe. Therefore, the cost is over $40,000 per created sale. The math is sound, you're just not thinking hard enough. Think: money spent, sales created. Those are the only two pertinent factors here.
Also important is that this cost-per-sale is going to skyrocket with any extension or expansion. Most of the fence-sitters have been pushed off, so the percentage of "created" sales will be much lower. Furthermore, if they increase the amount given, that will drive up the cost-per-purchase even more. I can foresee the cost exceeding $100,000 per created purchase. That's not just horrible economics, that's weapons-grade stupid. This credit must die.
First off for the buyer to recieve the money they have to jump through some pretty good hoops. If the closing is delayed for any reason at all then they don't get it. I've yet to have a first time buyer qualify. Give the money to the people who pay their bills.
ReplyDeleteIts a presumption that is completely fabricated to make up the $43K number.
ReplyDeleteBy all means, show us your math. Please use the NAR numbers as posted in the calculated risk post for consistency.
"Its me again from 10:16. Its wrong that the government sets aside $8K for EVERY single eligible home buyer and that the money is gone the moment that happens. Its a presumption that is completely fabricated to make up the $43K number."
ReplyDeleteHuh? What does that have to do with anything? It doesn't matter when you account for the $8K given to each homebuyer, the important thing is that it is a fact that this is tax revenue that would have otherwise been collected at some point. The financial cost is in lost revenue.
Fine. If the sole purpose is to spur ONLY home sales among first time buyers, then the point is made. Fair enough. But this is arguable. Again, I question the analysis when the presumption is that the intent of the funds is for and only for increasing home sales to first time buyers.
ReplyDeleteLike I said, not stating an opinion one way or the other. But I disagree that the intent is for only new home sales. And in that light, the NAR numbers being used in this context is pure fabrication.
Perhaps I'm point out the differences in the color of our glasses, but I read that the spending was for macroeconomic stimulus in general (which, to me seems like artificially deflating home values for new buyers coming in). And in *that* context, the NAR number is irrelevant.
Calculated Risk did the math correctly. He is measuring the average marginal cost of the credit, not the average total cost. Anon 10:16 appears to be unfamiliar with the concept of marginal costs.
ReplyDeleteSince 1.55 million qualified buyers would have bought a house anyway, the taxpayer cost to convince them to buy a house is zero. The credit persuaded an extra 0.35 million potential qualified buyers to buy a home. The total cost of the credit is $15,200 million. Therefore, the cost the government expended to increase sales by 0.35 million is [$15,200 million / 0.35 million = $43,429] per home. That's the average MARGINAL cost.
San Antonio Real Estate's comment adds a curious wrinkle. It will be interesting to see how many people actually get the tax credit they've been expecting.
Anon 2:565 said . . .
ReplyDelete"I read that the spending was for macroeconomic stimulus in general (which, to me seems like artificially deflating home values for new buyers coming in)."
-----------------------------------
WRONG!
How many different ways do I have to say this for you people to understand?
The tax credit does not create a de facto home price deflation because it is immediately factored into the selling price. The tax credit causes price INFLATION.
It is not a gift to buyers -- it is a gift to sellers.
If you bought a house because of this tax credit, you've been suckered big time . . . and you deserve it.
Anon, I don't know how you can conclude that the credit is deflating prices. Either from a simple supply/demand curve or from personal circumstantial and aggregate evidence, you should be able to tell the OPPOSITE is what's happening. Houses in my neighborhood were listing/selling for around $360k before the credit, and are now up to $400k. That's a huge bubble reinfation right there. This happens more at the lower end than the higher end since these are mostly first-timers, but it should be painfully obvious that it increases prices, sales, and commission for the NARbots to profit from.
ReplyDelete$360K for first timers???? Who has $72K to put down as a first timer?
ReplyDeleteoh wait...FHA is 3% down and a $7K credit...
They only need $3K cash money. (of which they can actually borrow from someone else!)
I cant wait until things go back to needing 20% down. Those first timer homes will be back to their 2001 prices of $120K.
As much as everyone loves to argue...I know it, you know it and most importantly, the gov and banks KNOW IT. Which is why it will keep going until they cant keep it going.
Tangelo Mozilo said...
ReplyDeleteWRONG!
How many different ways do I have to say this for you people to understand?
The tax credit does not create a de facto home price deflation because it is immediately factored into the selling price. The tax credit causes price INFLATION.
It is not a gift to buyers -- it is a gift to sellers.
If you bought a house because of this tax credit, you've been suckered big time . . . and you deserve it.
Yep.
Every seller knew that every potential buyer had $8k burning a hole in their pocket. That's $8k that the seller did not have to drop in price, small potatoes but, that's an $8k loss of buying power in a buyers down payment.