Edward L. Glaeser is an economics professor at Harvard.
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?
I'm not a fan of the original home buyers' tax credit, which offered up to $8,000 to buyers who currently don't own a home, but at least that policy could be justified as a tool for increasing homeownership and selling our current stock of vacant homes. I'm not sure either of those goals is worth subsidizing, but I can't think of any significant benefit that comes from giving current homeowners a buyer's benefit.
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.
One of the reasons for subsidizing homeownership is the widely held belief that homeowners are good citizens. Ten years ago, Denise DiPasquale and I wrote a paper investigating the links between ownership and civic behavior. Controlling for income, education, age and other variables, we found that homeowners were 16 percent more likely to vote in local elections, 11 percent more likely to know the name of their member of Congress and 10 percent more likely to say that they have recently worked to help "solve local problems."
But we also found that almost one-half of the effect of homeownership disappeared when we controlled for the time that the person had lived in the home. Owners are typically much less mobile then renters, and people who stay put are more likely to become civically engaged.
If you think that civic engagement is important enough to justify homeownership subsidies, then we certainly shouldn't be encouraging excess mobility.
But the new home buyers' credit does just that.
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.
“but I can't think of any significant benefit that comes from giving current homeowners a buyer's benefit. ”
Only entry level houses are moving. The original tax credit was supposed to dovetail with a recovery and re-opening of credit markets. Since the banks are still in trouble and can’t/won’t lend, the only source of funds is existing home equity. Look for baby boomers to move from lifelong homesteads hence opening up more property for sale. We have a long way to go on this, the baby boomers selling long time family homes will continue to boost supply and suppress home prices. A spot recovery city by city and town by town is what we have to look for in the next 5 years.
I don’t agree with the credit, but think I understand the philosophy behind it.
Matthew Fearnley Walpole, MA
I watched with dismay as housing prices exploded into the stratosphere beyond the reach of an ordinary working stiff. Contractors and realtors grew fat as families became increasingly stressed out chasing a basic human need. Housing prices finally broke as they no longer had a connection to reality. Coupled with the tax rebate, the world suddenly looks very different. Having rented for the last 16 years, I am finally buying a house again and look forward to all the benefits home ownership offers not the least the responsibility of community and citizenship that comes with putting down roots. I can’t convey the fundamental difference this makes in the lives of the invisible people who keep it all running.
“If my cousin and I sell our houses this year, and then move back three years later, we can make $13,000. ” Hardly. Presuming that the prices remain the same, closing costs will eat up the majority of that amount.
Otherwise I agree with the article.
“If my cousin and I sell our houses this year, and then move back three years later, we can make $13,000.”
And after closing and attorney’s fees, the expense of moving and god-knows -what-else, you and your cousin can blow the proceeds at a popsicle stand.
Some scam you’ve IDed, Dr. Fancy Pants.
I am not in favor of the tax credit for existing home owners but there is at least one scenario in which I think it can make a positive difference: unemployed people who are stuck owning homes in regions that are economically depressed. For example, a former auto worker in Detroit - he needs to move to an area of the country where unemployment is not so high. The $6000 credit is not much to someone on the coast with a job, but home prices are so low in places like Detroit that the credit could make a significant difference. No argument that the program is largely money wasted but the only help some Americans need in order to improve their lives is to be allowed to move. It is understandable for political reasons why the bill was called a “trade up credit” instead of “move out of Detroit credit”.
“It subsidizes existing owners to trade up or down…”
No, it subsidizes sellers. Prices will rise by $6,500 (or more with leverage.) The benefit to buyers is an illusion. The real net winners are those in sell, but don’t buy another house.
It is sad that in America, the government is more interested in promoting home ownership than insuring that people receive vital medical care. The government’s priorities are simply out of order. Home ownership is not a necessity. Food, shelter, and medical care are necessities - these should be the priority of government spending. There is something sick about a society where being homeless and living on the street is permitted, yet people making in excess of $150,000 per year get tax credits to buy fancy homes.
I view these kinds of tax credits as a kind of tax for those who can’t afford a home of their own. Apparently this group of people don’t have a very effective lobbyist to speak for them.
What about us homeowners that built a new primary residence five years ago right before the housing slide and then could not sell the primary residence they were going to use to pay for the new one?
This helps us out because now when we can sell the older house we don’t have to pay as much of the long term capital gain on the profit. ‘
See, if I had been able to sell the house 2 years ago I would not have to pay any long term capital gains tax on the profit from the sale - now because I have not lived in the old house at least 3 out of the last five years i have to count this sale as a long term cap gain - where if I had been able to sell it shortly after my new home was complete i would not have to pay any cap gains as the govt looks at it like I am going to invest whatever I make on the sale of this house to put into the new. But then the slump came and I was looking at selling the house at a loss if I lowered the price too much, so I rented it out for two years and then tried to sell it again - no luck - so now I have 3 more years to try and sell my old home and the $6500 tax credit will reduce the cap gain tax I have to pay on the sale of the old house.
Why not lobby equally hard for eliminating the home mortgage interest tax deduction which is more regressive and more wasteful? The civic benefits of home ownership are not related to the size of the home, so why do larger mortgages get larger deductions? A lump sum payment to first time buyers like the original program along with the elimination of the tax deduction would seem to be the least regressive way of encouraging home ownership. You should mention that the status quo policy has its own issues.
Bravo. the truth comes out. Why do we even subsidize home ownership? When I left Washington DC to move back to the West Coast I sold at a hefty profit, after deducting up to $34K/year in interest and home taxes while owning the home. What did I really do to deserve that? Nothing. How does that kind of policy help first time buyers, who are in lower tax brackets? Very little, if at all. And how can the present scheme be fixed so it doesn’t prevent the kinds of abuse you so rightly describe.
These are all tough questions for politicians who like to give out sugar pills.
But an even tougher one - why encourage home ownership that is so slanted to large single family dwellings built at the edge of sprawling cities on large lots? And why cheer the rise in home prices today? That just means present ownership make more money and non-owners have to pay more to get in, all driven by tax subsidies. In other words, since home ownership pays, why encourage it to pay even more with tax breaks. Even worse, why encourage more rapid turnover, which just increases the apparent number of buyers for a fixed supply, which in turn pushes up prices more.
Sounds like cash for clunkers, or rather, cash for castles to me. And I’m in Japan this week with a culture that appreciates live on around half of the space per capita that we have.
Lee Schipper Berkekely CA
This isn’t about the benefits of home ownership. This is a veiled way to facilitate the banks and brokerage houses to continue to unwind their mortgage-based derivatives. That process depends on some kind of valuation that isn’t continuing to tank. So the market is being propped up.
It’s a reflection of how much trouble we still are in. And how confronting that directly would risk exacerbating the problem by having a loss of confidence in the financial system.
At least that is how I see it.
Clearly, the politicians feel the need to placate taxpayer anger towards the huge bailouts of wall street. If wall street firms are still allowed to be gaming the taxpayer money without a deadline in sight, it only make sense the taxpayers be thrown a bone here with a deadline of May 2010. President Obama should had tackled banking regulations before health care, then this extension would had been unnecessary.
Fist of all, I disagree with the subsidy to an extent as well. However, I would disagree with the fact that giving a $6,500 one to current homebuyers isn’t helping. The expenses associatedd with selling your home added to the expenses of buying a new home can be enormous Including but not limited to bank fees, loan origination fees, inspection costs, survey costs, broker fees ,moving companies etc. Add to that the fact that very few homeowners move into a new house and do NOTHING to it (most of us wear a path to the local Home Depot in the first month) The problem I have with it is that a couple making $210,000 combined, can buy a house for $790,000 and expect to get a $6,500 tax break, which I am helping pay for. Sorry, but if I make that kind of money (which I do)and need to buy a $790,000 house (which I do), I DO NOT need a break! I am a fortunate person and I’d love the money, but I think there could be a greater focus on the folks that could use it more while still playing a great role in stimulating our economy.
Clearly, these are great arguments to make against the credit. Unfortunately, I doubt it matters.
This credit was always about good lobbying, not good economics. And the latest, all-out lobbying effort by the realtors and home builders (see link below), would have made Boss Tweed and the old Tammany Hall gang jealous.
http://narblog1.realtors.org/mvtype/president/call_for_action/
bah humbug. there is certainly always something to grouse about in any government program. Did you mention any of the positive aspects of the bill? Next up, Christmas: it encourages people to buy things that others don’t need in an attempt to curry favor. And, there is no expiration date on this holiday. It may go on forever! Yikes.
I was a fervent Obama supporter, and supported the stimulus package, but have been incredibly dismayed that the administration keeps backing stupid economic policies like the home buyer’s credit. If we’re going to give money away, at least use it to make societal improvements. The money could have been used to really improve energy efficiency of homes, for example. Spending like this is how you guarantee that Republicans take power again. It seems to me that Obama’s just throwing money away now.
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