Tax Credits, Screwdrivers, and Supply and Demand Curves

Our Washington Post online column today is another cry in the wilderness against the homebuyer tax credit.

There are many arguments against the tax credit. One argument we make is that the tax credit is a benefit for sellers of houses more than for buyers of houses. This is simplest to see if you imagine  a permanent credit available for all buyers: “Imagine the credit were expanded to all home buyers and made permanent. This would simply boost housing prices at the low end of the market by close to $8,000, since all buyers would be willing to pay $8,000 more. (Prices would rise by a little less than $8,000 because at higher prices, more people would be willing to sell.)”

It turns out Nemo had made a similar argument already.

Small point: Nemo (in a follow-up post) says that the tax credit should boost prices by exactly $8,000 (leaving aside leverage for now), because in the short term the supply curve is vertical. I’m not convinced. The reason we said “close to $8,000” is that the supply curve is typically upward-sloping, not vertical, as shown on the graph in that follow-up post. The supply of houses can shift quickly, because people can decide to sell their houses (say, retirees planning to move to apartments in the city can move that decision forward). Also, if the credit is not available to everyone, it won’t shift the demand curve by exactly $8,000 at every point, because the demand curve for houses is the sum of every individual’s demand for houses, so only some people’s demand will change. This is why expanding the tax credit to everyone is such a bad idea. When you restrict it to first-time homebuyers, they get at least some of the benefit.

Bigger point: Nemo points out that the $8,000 increases the homebuyer’s ability to make a down payment; since mortgages provide leverage, this means the potential impact on prices is much higher. If you are buying a house with 3.5% down, then arguably an extra $8,000 in cash (which some states will advance you) can boost your buying power by $200,000. Now, this is a complicated issue, since unless you can get a no-doc loan, you still need to qualify for the monthly payments. (Nemo discusses this here.) But I think it’s fair to say that at least some buyers are constrained by the down payment more than by the monthly payments, especially with interest rates so low (I saw this in my summer legal services job). So the potential impact on a household’s buying power could be a lot more than $8,000, as Nemo says.

The net effect is that the buyer pays an inflated price for a house, which will get deflated when the tax credit prop gets taken away. I believe in some places you can effectively use the tax credit as your down payment; this means you will have close to zero equity when the credit goes away, unless housing prices rise.

By James Kwak

65 thoughts on “Tax Credits, Screwdrivers, and Supply and Demand Curves

  1. Maybe in a normal market. But when house prices are crashing, are incentives ineffective? You may be correct, but is there evidence that people would have bought anyhow without the tax credit? Seems to me people were frightened and were sitting on the sidelines. Morevover, sellers were taking what they could get.

    That is different than whether tax credit extension was necessary.

  2. I both respectfully disagree and agree with your thesis in the WaPo article.

    Contrary to what you implied in your article, NO ONE (Banks, County or our State) are allowing the Tax Credit to be used as assistance toward the down payment or closing costs on any property (contrary to the announcement from Sec. Donovan in early May of this year).

    When vacant properties are purchased and lived in, it not only improves the neighborhood BUT ALSO STABILIZES THE TAX BASE FOR THE AREA – and that allows for FEWER layoffs of Police, Teachers etc.

    My son, a school teacher, would not have considered entering the market EXCEPT FOR the 8K tax credit. It was an offer too good to not consider when combined with other programs that are also available. Admittedly he has EXCELLENT credit, with his car paid for, no student loans, no other debt.

    He is finally closing on a townhouse (after 4 other offers) and will utilize the tax credit as a cushion for savings when he receives it next Spring.

    Regarding your comments on only foreclosed properties, there has been a HUD program that many counties are working with called the Neighborhood Conservancy Initiative that allows up to an additional 25K loan (grant after 15 years occupancy) for ‘foreclosed’ properties only – with defining parameters (ie: An offer on any property must appraise at 1% LESS than the offer price, a 10 hour Buyers certified course and there is a salary cap on eligibility). In his county, there is also a 1st Time Home Buyers Assistance loan.

    He did not use the NCI program for the following reasons:
    1) He was bidding against ‘cash’ / speculators and they could close in 30 days and NCI loans took a minimum of 45 days to close due to paperwork & procedure. He lost out on 1 offer to IndyMac Bank for that very reason – even though his offer was +$13K MORE than the ‘cash’ offer.
    2) There were few foreclosures on the market in his area (as compared with Short Sales) and see #1 when foreclosed properties came on the market.

    He is now closing on a foreclosed property which is not move in ready; but that he can afford to carry comfortably WITHOUT using the Tax Credit monies.

    There are SO many wonderful programs available right now to 1st time Home Buyers but few people (including agents and lenders) know about or can participate (without a seminar) in all of them.

    In Maryland, there is also 1st time Home Owner tax assistance; yet, folks fail to mention it as assistance when viewing a listing that has had its taxes assessed in 2007 or 2008 and are artificially high.

    I would agree with your thesis regarding this tax credit in as far as this:
    That people became so desperate to close a deal BEFORE this tax credit expired that bidding wars became the ‘norm’ versus the ‘exception’. My son walked away from one offer because of that. Each of those bidders was utilizing the NCI monies and that loan gave them the ‘false courage’ to up their bid and indebtedness AND inflating the value of the property in question – that is the point in your thesis I agree with.

    In conclusion, some of the HUD stimulus money would be better utilized if:

    It would pay for each State to have a Center where all that State’s assistance could be found in ONE PLACE versus scattered throughout different departments (ie County vs State programs).

    IF it could be applied to Short Sales (which too often are vacant properties) that pull down a neighborhood’s value and do nothing to ADD to the tax base of that community.

    Many of the foreclosures are 100K LESS than what was previously paid for them and that cushions any potential for loss on value. You just have to be willing to really do your homework before looking.

    Also, until the end of October, any foreclosure through Freddie Mac has both Closing Cost assistance and a 2 year home warranty paid for by buying 1 of their properties through their Smart Buy program.

    This is NOT such a ‘black and white’ issue as you have portrayed it; yet, it does take a lot of research and asking of questions (see my suggestion about a One Stop Shop (center) for each State to assist buyers).

  3. From Stacy-Marie Ishmael on Alphaville:

    “According to a Goldman Sachs analysis, interventions by the US government in the housing market added an average of 5 per cent to home prices nationally.”


    “But these artificial props won’t last forever and may have created a false bottom in the market. “The risk of renewed home-price declines remains significant,” Goldman economist Alec Phillips writes in the report, “and our working assumption is a further 5% to 10% decline by mid-2010.”

    My view:

    So, if we didn’t implement these policies right near a real bottom, we either:

    1) Continue the Subsidies Indefinitely
    2) Risk a Second Big Drop & another Push towards Deflation.

    Of course, all this was known at the time, so we simply have to wait and see if the people arguing for and implementing these subsidies knew what they were doing. At some point, I suppose, we’re bound to find somebody who does.

    I’m not sure about that last point. All this is a lesson about subsidies though, which we’re throwing around in an uncoordinated manner in some areas.

  4. Dr. Kwak —

    Thank you for the publicity.

    You make a fair point that supply can appear quickly.

    On the other hand, I doubt that your “retirees planning to move to apartments in the city” is the typical case. Far more common, I suspect, is the “bank sitting on foreclosure inventory”.

    In short, the tax credit is a bank bailout masquerading as a populist measure.

  5. Dear Nemo:

    A question:

    Haven’t we, the taxpayers, bought a lot of these ‘underwater’ properties?

    If that is so; then, it might behoove us to extend the tax credit at least to 1st time Home Buyers to attempt to stabilize the real estate market and attendent tax base.

    Just sayin’…..

  6. You cannot “stabilize” a market with government subsidies. You can only distort it.

    Put another way, any “stabilization” is temporary. It will either put a drain on the Treasury forever, or it will disappear when the credit expires.

    Re: Down payments. Money is fungible. The tax credit is money. The down payment is money. Therefore, the tax credit helps with the down payment, period.

    My son, a school teacher, would not have considered entering the market EXCEPT FOR the 8K tax credit.

    Then he should not be in the market. His presence is artificial and is distorting house prices. He overpaid for his house, just like everyone else entering the market because of the tax credit.

    This will become quite clear, in time…

  7. Fascinating that you can make such a ‘definitive’ response without fully knowledge (which was not disclosed) and making a ‘specific’ meaning of the 8K tax credit without reading the other responses…..

    For instance, where he bought, there are still townhouses being built and BOUGHT for between 210K to 240K and he paid less than 150K for his 3 year old unit ….

    He did not use and will not use the 8K toward the down payment but instead as a cushion in CDs as written above.

    Again to my question to you, IF the Gov’t (taxpayer) has already made a substantial investment in buying underwater properties, is liquidating those properties through ‘subsidies’ such a poor choice?

  8. I am sure it was an absolute steal.

    Had the government “made a substantial investment in buying underwater properties”, then the tax credit would be a payment from the government to itself, distorting house prices along the way.

    But the government has made no such investment. The overprices properties are still on the books of financial firms, either as collateral for bad loans or as foreclosed properties. So the tax credit is a transfer from taxpayers to banks.

    The brilliant thing about it is that people like your son think it actually helped them, when it is really just a banking subsidy. You really can fool all of the people some of the time.

  9. Dear Nemo:

    Would be very interested in knowing more about your background and life experience. It would assist me in understanding WHY you feel the need for the ‘snark’ in your replies….

    I ‘sense’ perhaps incorrectly, it is from an educated ‘elitist’ perspective of academic bent that you ‘assume’ that I do not have….

    We do know what happens when one ‘assumes’…

    Just asking???

  10. Fungible money. Sort of like how any tax on business is automatically transferred to the consumer? I read that argument all the time in WSJ.

  11. My fear is it is the $8,000 tax credit will encourage those people who have no business buying homes into buying homes. Therefor the tax credit drags out this madness with housing foreclosures one cycle further. This tax credit wasn’t for first-time home buyers. It was for politicians to build up political capital with voters. Tax credits don’t do a lot to impact your future streams of income. So the decision of whether or not it’s a wise purchase (for the house) remains roughly the same.

    It will be interesting to see (surely some economist/statistician will tabulate numbers on that) what percentage of the people who took the credit (especially first-time homebuyers) will end up paying ALL the mortgage and owning 100% of the home. OTHERWISE IT’S JUST COMMISSIONS AND FEES FOR BANKERS AND REALTORS.

    This tax credit is something mainly for the National Association of Realtors (NAR) to drool over. Dean Baker over at The American prospect has his opinion about it.

  12. I assume nothing about you save what you express in your writing. You might consider returning the favor.

    I was born snarky. The targets of my snark span all races, genders, sexual orientations, socioeconomic strata, and political views. So please do not take it personally.

    In my day job, I am a software engineer. We make the best Internet crackpots.

  13. No. More like, if you buy gas every week, and I give you $5 but require you only to use it to buy gas, that is exactly the same as giving you $5 with no strings attached.

    I realize it is a big three-syllable word, but the concept is actually very simple.

  14. The whole argument in WaPo is futile. I am buying a sub-$50K condo in OK as a first time home buyer, and inspite of putting down 20%, having annual income twice my mortgage, near perfect credit score, I was treated as a pariah in the mortgage market until a local credit union stepped in. And it was not because of the small amount of mortgage or lack of fees they could tack on. It was because I lacked installment loan history – what? you don’t take out loans? If this is the way banks are going to lend, then no amount of tax credits are going to help. More important than worrying about tax credits is making banks lend more. After all, tax credit as of now only helps a small number of people.

  15. Nemo, you’ll win more converts with less obnoxiousness. Part of the point of this blog is to educate people on financial and economic matters.

    As to the gas analogy, I would be more willing to buy gas if you give me $5, not unlike a housing subsidy. Regardless, I surrender, and admit that I am likely mistaken.

  16. Sorry, Bill. I think I got up on the wrong side of the bed this morning. And I did not appreciate being compared to the WSJ editorial page…

    “Market distortions” are not always bad. But the kind that inflates house prices and transfers yet more taxpayer wealth to bankers?

    If even a few people read this blog and conclude, “The tax credit helps me buy a house, and that is a bad thing“, then I will be happy. (The credit does not help you buy a house; it helps everybody like you to buy a house, which is not in your interest at all.)

  17. Your article completely ignores any effect the program may have on new housing construction as the backlog of unoccupied homes diminishes. One would expect an increase in house building would keep prices lower, while creating more jobs, just as you argue building roads would.
    Moreover, when people purchase existing homes they usually also spend money in remodeling, refurbishing and improving the property: a new coat of paint, a pool, a new driveway, new kitchen cabinets, etc. Perhaps the impact of these circumstances may not be significant, or may be very important, but it is worth discussing.

  18. The telling part of this post is “this is simplest to see if you imagine a permanent credit available for all buyers”. In other words, if we had a housing market in equilibrium and injected an $8,000 subsidy into that market, the new equilibrium price would be higher (as James mentioned, the amount of the $8,000 that would go straight to price increases would depend on the characteristics of the supply curve). Neat. As Nemo mentions in his post, this is Econ 101 stuff.

    The problem with this argument is that the housing market is not in equilibrium, the subsidy isn’t permanent, and the housing market isn’t isolated from other markets. There is a reason the Econ curriculum doesn’t end at 101 and why academic research in Economics still goes on.

    I don’t know what the final impact of the credit will be and I imagine if anyone cares 50 years from now, there will still be a healthy disagreement about it. However, I can think of two possible positive impacts off the top of my head: prevent an overcorrection on the downside in housing prices which could kick off a deflationary spiral and/or work as a stimulus program that is likely to be spent rather than saved and thus have a high multiplier (as Nemo points out, this money is fungible and “savings” on housing is likely to be spent somewhere else). Oh, and DariMD makes a good point that it will stabilize the tax base for the area leading to fewer layoffs of civil servants and the deflationary impacts that could have. And, actually, the leverage gets banks in the game by pushing them to lend and increase the money supply. Ok, I’ll stop now.

    Now, is this the best use of the fiscal stimulus money or even a good idea? Beats me… but I do know enough to be wary of people who try to determine macro policy by repeatedly explaining the lessons of Micro 101.

  19. Nemo, don’t be so hard on the WSJ. I found it’s extremely useful the morning after an evening of gluttonous consumption of Mexican food. I also bring reading materials.

  20. to DariMD and other tax credit fans

    The ´first-time buyer’tax credit is a misnomer: its purpose is to aid banks with MBS on their books, as it is an attempt to reflate the housing prices (hence less reduction in mark-to-market prices for MBS and less losses if a house falls into foreclosure, as it is sold at a reflated price).

    Please realize that any tax credit for person A
    1) is money not spend as aid to another person (e.g. aid for sick wars veterans, shelter for homeless, food stamps, etc, etc, etc) and/or
    2) is a tax burden for person B.
    As a society we have to think seriously before handing out billions of tax credits as yet another stealth bailout of the bonus banksters.

    Also, any program set-up in a hurry is bound to be bad.

    From WSJ:

    -“The Treasury tax-oversight office said at least 19,000 filers who hadn’t bought homes claimed $139 million in tax credits and were reimbursed.” !!!!!

    -“Treasury oversight officials said they have found an additional 74,000 tax-credit claims, valued at $500 million, where evidence of previous home ownership could make their claims invalid.”

    -“More than 500 people under the age of 18, including a 4-year-old child, also had their names on applications for the credit, which has no minimum-age requirement.”

    Now, the realtors and banks are lobbying hard for extend and expand: $ 15000 for all home-buyers till July 2010. So many more fake home buying/selling at tax payers´ expense.

    And if Congress does not fall for the scam, than another program, shoveling the mortgage guarantees once and for all onto the taxpayers, is already in the making, involving Freddie, Fannie, FHFA,and Treasury, see

  21. Because the problem with the housing market is insufficient supply?

    Sure, if you only focus on construction jobs and such, things are just peachy. Except (a) that is not where most of the money is actually going, and (b) the money does not just go to places; it comes from somewhere.

    (cf. Broken Window Fallacy)

  22. Housing is dead for the short term, and if not it sure should be. The volume of vacant buildings is enormous (at least in the part of the US that I work in), and these are hitting local governments and schools with declining property tax revenue.
    There are so many vacant houses and commercial building as it is, who would buy the new ones?

  23. I don’t buy it… it seems to me that you’re hitting on all the selling points. If the idea of the tax credit is to soften the collapse in home prices and in that way allow households to preserve and repair their balance sheets (in the short run) than you’re arguing that it should work. After-all, the sellers are the ones in the most financial distress, so a transfer from the well-offs, who can think about buying a home in this economy, toward the not-so-well-offs who are so desperate to sell that they’re selling at a big-loss. Or from the unhealthy balance-sheets to the healthy ones… it sounds good to me. Are there long-term consequences? Of course, as with any good stimulus, but in the long-run we’re all dead.

  24. Without any manipulation wouldn’t home prices overshoot on the downside before stabilizing? If so, hasn’t the tax credit helped put the brakes on a bit earlier to the benefit of many home owners. Where the brakes were applied too early I understand prices will fall further once the credit is removed. I don’t want to see it extended. But, to say it’s all inflation and only benefits banks takes it a bit too far I think. My vision may be distorted by the bubble in which I live.

  25. All these programs are only available to folks that qualify at 80 percent of medium income. From the research I have done many of these home buyers make on average 35,000 to 45,000 a year by working 2 jobs. I fear these are the same folks that will walk away without a second thought when real estate drops another 10 to 15 percent.

  26. Bilbo: ¨…. But, to say it’s all inflation and only benefits banks takes it a bit too far I think.¨

    I said the purpose of the tax credit is to reflate and aid banks.

    Look, what is a house? It is a roof over your head, and hopefully a nice place you feel at home. After the dotcom bubble and with the FED´s almost ZIRP, a house became an investment vehicle, instead of a place you feel comfortably at home, whether you rent or bought.
    Bubblenanke is on the record (in a speech) that he did not see anything wrong with the housing bubble. He said his critics were wrong complaining about ordinary folks taking on too much debt: yes their debt increased, but so did the value of their assets, so no problem at all for Bubblenanke. Of course, his critcs were right and the FED was wrong. It is NOT a matter of balance sheet (high debt versus high house prices), but a matter of cash flow: you need a certain income to service the debt, i.e. to pay the mortgage interest, and to pay off the mortgage over time (otherwise, you´ll never be a home owner, but remain a mortgage owner).

    So, we should leave the get-rich-quick-speculative-house-flipping and return to a house as a place to live, whether you rent or buy.

    No propping up of balance sheets, but proper cash flows: decent minimum wage/income/salaries with which we can pay the bills (incl. rent/mortgage).

  27. Carol: I’m hearing ya, but what has that got to do with the tax credit. If banks are still approving loans where income is too low or debt too high that’s a separate problem.

  28. Simply visit a mortgage forum today and read real-time about the credit worthiness of the folks buying today.. I guarantee you it will blow you away.. Folks with a bankruptcy or foreclosure just last year are getting fha backed low interest loans with assistance from the county, township, community development, hud, usda rural, “low income assistance” program allocated by each state or whatever you want to call it program. There has been no restrictions on FHA and I would bet my life savings the loans backed by fha this last year 50 percent will default over the next 3 years. I have not been wrong yet on the housing market in the last 4 years by educating myself real-time by going to the source!!

  29. Heres another little tidbit.. Did you know that fha allows 8 percent of the sale price to go to realtors.. On a forum the other day a mortagage broker was complaining because the realtor was trying to get 10 percent as a dual agent realtor and this mortgage broker was trying to figure out a way to game the system so fha would back the loan..

    Its ugly folks.. Trust me.. Just go to the source.. Mortgage brokers, realtor, flippers have never has it so good..

    Ok.. i can’t talk about this anymore.. It gets me very angry..

  30. Another unintended consequence.. Many people needed to use a “straw buyer” family member or friend on their mortgage in order to qualify for “first time”.. How many people who co-signed are now on the line for a house but don’t live in it? I can’t tell you how many times I have read on a forum for help in figuring out how to game the credit?

  31. Blaming the tax credit for anyone’s decision to cosign a loan seems like a “straw man” argument.

  32. “He is now closing on a foreclosed property which is not move in ready”

    How the heck is a 3 year old unit not “move in ready”?

    paint, carpet?

    BTW, what Nemo is trying to explain is that your son overpaid relative to what he would have paid WITHOUT the 8k tax credit, this is what you don’t get.

  33. Bill, I got news for you. Sellers who actually sell, under all circumstances, take what they can get.

  34. You’re wrong. Plain flat and simply wrong about what the effect of the tax credit is and where the money is going.

    What is happening, out in the real world of real estate brokerage is the foreclosure bomb has taken prices to levels not seen in about six or eight years. That is enabling folks who would otherwise be on the sidelines to get into houses. There has been no impact whatsoever on first move up houses or above.

    Are prices 8,000 more expensive? Hell, no. Is the tax credit having a huge impact in terms of demand. Nope. Is there a reason to continue it? Nope.

    What can and should be done is to send to prison everyone at every bank who gets a bonus, then repopulate managerial ranks. Well, OK, that is, at best, unreasonable. It does, however, express the extent to which the banks are the problem. Management is refusing to hire enough bodies to handle the “short sale” problem… which becomes a foreclosure problem. Buyers are having to make as many as a dozen offers to get one to close before the baby arrives… literally. That also means real estate brokers are now getting paid about $3/hour for dealing with the mess made by idiots on top.

    Do the banks need to hire the best and brightest? What for? They are only bankers, not astrophysicists or high energy physicists or genetic cancer researchers. What benefit accrues to the society by having myriad derivatives which not even the creators of which understand? Yet who is forced to pay for the stupidity of supposedly the best and brightest?

    By the way, anyone who understands the ways in which the central limit theorem does NOT apply to assorted derivatives and to the markets at large had no problem anticipating both the stock market collapse and the real estate market collapse. I say “anticipating” not “predicting exactly when” because one never knows quite when the pin will prick the bubble.

  35. I agree and the proof is in the performance of auto sales post-Cash For Clunkers. People “overpaid” for cars using other people’s money and once access to that money went away, car prices looked too expensive.

  36. Nice job Nemo. It’s not only a seller credit, – that is only temporary – it’s a gift to those disgusting urchin real estate agents and brokers, Those leaches ultimately end up with the loot.

    It’s a Nobraina, nobama.

  37. Arguing about whether the Go’mint should or shouldn’t make penny ante gestures to selected beneficiaries and constituencies is a waste of intellectual resources and capital. Of course the Go’mint shouldn’t do this. Unfortunately, we live in cloud cookoo land, where the Go’mint is the solution to the entire over leveraged fraud infested fantasy driven hollowed out so called real economy.

  38. I finally understand why there was no housing bubble! If I borrow one million dollars to by a one million dollar house instead of $500,000 to buy a $500,000 dollar house, then it is ok because I am wealthier with a one million dollar asset instead of only a $500,000 one. So the price must have been the correct one even if it is the same property.

    But when are we going to get it through our fat heads that a house is not an investment, but an expense as Carol points out!

  39. Since one of the main topics here is taxes, I couldn’t resist putting one more post related to taxes. There is a Republican named Bruce Bartlett who also has his own blog “Capital Gains and Games” where he and 3 other gentlemen write on many economics and government policy issues.

    Oftentimes, we hear Republicans talk about tax credits and tax cuts as a way to “stimulate” the economy. Yet it is quite easy for a child to understand that when the economy is in a very bad condition and almost no money is being spent or earned, tax cuts and tax policy would have almost no short-term effect. It is obvious on the face of it.

    But what about government stimulus spending, pumping money immediately into the economy?? Of course long-term this really hurts, but unless you want to get stuck in years of stalwart growth, government stimulus spending is almost the only choice.

    Here is a link to Bruce Bartlett. He is a former policy adviser under Ronald Reagan and a high ranking official in the treasury Department under George H.W. Bush. Bartlett is obviously a Republican. His thoughts on tax cuts during economic crises, coming from his Republican mind, may be a shocker. But to me they seem to be pearls of wisdom spoken in a down-to-earth way. The most important parts in my opinion are when he talks about TRANSFERS and VELOCITY. Great stuff.

  40. This crusade against the Homebuyer Tax Credit is ridiculous. Anything that helps prop up our Potemkin village is good. Period.

  41. That’s what I’ve been thinking. While taking advantage of the $8k has been tempting to me (I’ve never purchased a home, and my credit is quite good), I keep thinking that the extra money in the market is just a way to artificially extend the bubble. Nobody wants it to end, nobody wants to give up on the thought that their house is worth 20%-50% more than what it should be. The more people that pay those inflated prices (via government trough, etc) the longer the prices remain too high.

    Things need to fall back to sane levels before I’ll even look at buying a house again, even with $8k on the table… I think the market could fall further than that amount.

  42. As a recent home buyer, the $8K tax rebate did not play a crucial role, but it was a factor in my decision to get off the sideline and to act before the program expired.

    The main reason why I bought is that my income has gone up significantly the past two years as home prices in my desired market came down.

    Even though I was looking in what is said to be the top real estate market in the country, and at a price range where houses are expected to sell quickly, I was able to buy a unique property for what I perceive to be an excellent price.

    The seller did appear to have a desire to sell. He appeared to be underemployed — working as a software engineering consultant. He had refinanced the property and taken out quite a bit of equity in the past five years, but still had an equity cushion to make the deal happen. (He purchased the house in the 1980’s).

    What I saw from my very limited perspective is that the pending tax credit pushed me to make a deal. I looked at thirty to forty properties. Fortunately, the seller of the one I wanted was motivated to make concessions to close quickly, and I used the other properties on the market to negotiate a more favorable price. Based on previous sales, the selling price was below comparable sales six months ago.

    As it is, I may not qualify for the tax credit because my income has gone up so much. My purchase was obviously targeted, but at least in my case, the pending credit may have helped push prices lower.

  43. Bilbo, thanks for listening ;-)

    “If banks are still approving loans where income is too low or debt too high that’s a separate problem. [separate from tax credit]”

    Yes, you’re right, that is a separate problem. And in my opinion, that problem is the root problem of the housing crisis (I’ve read economists’ articles explaining that the housing bubble burst at the time of the speculative oil bubble: ordinary folks putting so much money in the gas tank, that not enough was left for servicing the huge mortgage, which had just at that same time increased by 200 or even 300%, as the FED finally had increased the interest rate, unfortunately impacting ARM-resets).

    I am in favor of solving the root problem: getting housing costs (rent or mortgage) in line with income.

    The ‘first time buyer tax credit’ does not contribute in a sustainable way to solving that problem.

    In addition, I believe that governments should be very careful with tax credits: it cannot continue endlessly and implies that either you cannot pay for something else (proper infrastructure, education, high-tech research, National Park Service, clean-up of polluted sites, extended food aid, etc. etc.) or you increase the tax burden of taxpayers.

  44. Instead of helping folks buy homes to drive down the outstanding housing inventory why don’t we look at keeping folks in their homes to slow the rapid increase of the outstanding inventory? Something like a moratorium on mortgage interest rate hikes until the mortgage is renegotiated at a fixed rate, encouraging rent-to-own contracts, or something along those lines? I realize this stuff won’t be as effective as it would have been early on, but it might help. Why are we seeing numbers on home sales and foreclosures when outstanding inventory is more telling?

  45. I’ve been in the market for four years looking for an affordable house, truly an oxymoron. I’ve been variously shocked, disgusted and now at my wit’s end. At first I liked the $8,000 tax credit but now I think I may as well go over to the local bank and take it right out of your savings account.

    Home prices are way out of whack with people’s incomes. If the median income in this country is somewhere between $40,000 and $50,000, then the prudent median home price should be $125,000. Right? So that a person can actually service the debt and have a little left over for oh, say, health insurance premiums and a car payment. I read today the median home price is now about $175,000. It’s still too high, folks.

    But people have to hold on to their inflated home prices because, don’t you know, it’s our retirement nest egg, since Wall Street and the health insurance industry have stolen our wages and our 401(k)s and our pension plans.

    All of our state and local guv’mints jumped on the property tax and sales tax banana boat fueled by debt, debt and more debt. So they’re in no better shape than the middle class.

    So no. I will not take the $8,000 tax credit whenever I do buy a home, which won’t be anytime soon. Prices need to come down and we all need to come back to earth.

  46. If everyone got $1 (regardless from whom) to buy a screwdriver, prices would go up by $1?

    Wow – what if there is no demand for screwdrivers? Buying one would then decrease utility.

    If Best Buy gives everyone a coupon for $100 off a TV, that raises the price of TVs $100?

    What if the government gave everyone $1 billion for a hydrogen bomb? If no one wants one, they won’t buy, regardless of how much the government gives them. Any idiot should know that. (I am not advocating this as a policy)

    If supply and demand were anywhere near equilibrium AND no other subsidies in place, then a tax credit subsidy would have a direct effect on increasing prices. In a similar way, the federal tax deduction for homeowners normally subsidizes prices, but since aggregate middle-class incomes are declining (unemployment) and homes foreclosed, tax benefits are reduced, hence less of an aggregate subsidy on house prices.

    We should try to understand what the government is trying to do, whether that policy makes sense, and whether their policy has any chance of succeeding (e.g., accomplish their stated objectives with minimal unintended consequences).

    What the administration wanted to accomplish (IMHO) was to slow the fall in house prices, provide some kind of benefit to the “middle-class” and increase money velocity (inflate the economy).

    So, the program provides a subsidy to both first time homeowners and to banks – by design. The economy is supposed to get additional juice through velocity and consumption stimulus and the fall in house prices buffered a bit.

    The administration put this program in place when prices were falling dramatically – hard to see direct causation, but it appears to have helped to slow the decline.

    One problem they were trying to address was the “wait and see for prices to bottom” syndrome. No one buys until prices bottom (actually overshoot bottom), then demand picks up. By providing a tax credit, it provides some “insurance” to the buyer from price declines – hence people who weren’t considering the market (suppressed demand) are provided an incentive to consider the market.

    Its hard to calculate what the slowdown in price decline is – if housing had no subsidy (e.g., no deduction of property taxes, no deduction of home interest, and the fact that home interest usually puts you over the top so you CAN deduct in the first place), then it would be simpler. But we have countervailing subsidies at work – the decline in jobs and taxes are reducing the effect of the existing subsidy. That could also be viewed as a “market distortion” reducing prices beyond what normal supply/demand would indicate.

    Now, the administration tried to design the program so that it was difficult to game – first time buyers only, stricter loan process, etc. There is always some fraud in any program (public or private), but there was a legitimate attempt to put in place a reasonable set of controls.

    I don’t necessarily agree with the policy – primarily because I think there are better uses of the money, but I think the Administration substantially achieved their objectives. I agree that a slow wind down of the program is in order. But I believe that if prices were substantially higher than what the “market” would provide, then non-first time buyers (usually more sophisticated) would exit the market. This reduction in demand would also depress prices. Not easy to determine what the net effect is. But not $1 subsidy to $1 increase. I do believe that one impact is that bottom fishers (waiting for all homes to be priced at Detroit values) were somewhat disappointed. But time will tell.

    It isn’t surprising that the real estate industry wants an even bigger handout and a permanent and/or expanded credit – that would be a absolute disaster.

    I would prefer to see programs that focus on increasing incomes, but government job programs are non-starters with Congress.

  47. We are now a nation of $11 an hour jobs (with no health care).

    I’m afraid housing has got a lot of catching up to do.

    Why not make the credit permanent, index it to increase by some value each year (peg it to something guaranteed to inflate, like interest on the nation’s debt, or oil denominated in dollars, or just pick any old feel-good number), and pretend that everything is going to be ok?

  48. JK and Nemo:

    Your point that the program is a price support is well taken. But, other than the fact that targeted tax credits are not necessarily the best way to support prices (since they incur debt), are you generally opposed to supporting prices?

    Or, to put it this way: Is the cost of price supports higher than the cost of managing/transacting foreclosures, taking over and liquidating banks, managing bankruptcies (that could have been avoided through property sales), direct bailouts of the banks, lower tax revenues due to income tax and property tax declines, and maintaining unemployment support programs?

    I suppose my reaction is this: as long as the money to fund the tax credit is coming from printed money rather than debt, it may very well be doing far more good than harm.

    The counter-arguments are primarily the same ones shared by the Liquidationists in the Great Depression.

  49. James,

    Are you arguing that the price elasticity of supply of houses is zero? At least at the low end? Yes, it takes a while for the supply of NEW houses to change but the excess supply there is larger than at higher price points – arguing that the price increase would be muted. And that is only for a time as we must have a large building capacity sitting idle today. If the 8K grant were to be made permanent wouldn’t the supply of houses simply increase at the low end (granting that all of these people are buying at the low end, which I doubt)?

    Look at cash for clunkers. Did we see a uniform rise in the price of (low end, fuel efficient) cars? No, dealers were glad to sell at existing prices and lower their inventory (as were the manufacturers). Aren’t home builders in a similar state overall?

    If we made the cash for clunkers permanent would the price of all cars go up by the amount of the cash grant? Low end cars? Given the excess production capacity in the auto industry that seems ludicrous.

    It seems to me that making either of these programs permanent is not a good thing as it distributes taxes (owned by us all) to the segment of society that owns houses (cars) and thus disadvantages the poorest among us. But it doesn’t seem at all clear that it would uniformly raise the price of houses (cars) in our market system.

    Otherwise in almost complete agreement with your posts, I am,



  50. It is hard for me to imagine that the credit would do as much to increase home sales activity as the “clunker” credit did for car sales. First, the difference in payment, length of commitment, and related costs is much greater, and, in this economy, I don’t believe that there are that many discouraged buyers out there waiting for help or encouragement. This is in addition to the potential damage of the distortion created by the effect on both pricing and buying power as mentioned.

    If it is done, it should definitely be limited to first time buyers, but, perhaps a more effective tool would be for the government to “buy down” the interest rates for first time buyers, thereby simply creating a more affordable mortgage, but this should only apply to fixed rate 30- or 40-year mortgages, and not to any adjustible or balloon. There are lots of inexpensive homes available for first time buyers, because of all of the empty foreclosed properties, and so this would put lots of homes back on the state and local assessment rolls which are presently not paying taxes and bringing down the value of neighborhoods.

    The other issue is, would this be devoting money, as tax credits, in an economy where so many homes are in default and foreclosure. Wouldn’t it be a better use of resources to find a way to keep people in their homes, instead of creating a broader market of unoccupied properties and more drag, not only on the housing market’s depressed prices, but also on the general economy?

  51. Ted, you are right, this is a terrific article, and simply verifies what I have felt about Republicans in recent days: that they are mantra happy, and ideology happy, and aren’t interested in being rational about much of anything. After all, if you are trying to rationalize positions held by the key lobbies that pay your campaign bills, rationality is a losing strategy.

    It is a bit naive to expect that most of our legislators are interested in rationality, the human thought process, clear headedness, even handedness, or trying to help the broad electorate. This Congress is largely about spin and obfuscation, and not at all about clarity or the public weal.

    I hope that more of us can work toward an overthrow of those who are leading the charge over the cliff of disaster for our country.

    So long as tax cuts and credits prevail, we will continue to struggle. What happened to a world (the 50’s) where the rich did not control Congress and paid 90% tax on their income. Boy, if we did that now, we could stimulate and still have a balanced budget!!!!!!

  52. Actually, Plebeianswillrevolt, it’s worse. Much less about lining the pockets of realtors, and much more about lining the pockets of the investment vultures who are swooping in to buy homes for pennies on the dollar and who will profit immensely (probably double or triple their money) from this tax credit. With the supply of homes on the market and interest rates low and probably staying low, there is really not much useful to be said about a tax credit.

  53. Bill,

    Do you not believe the “only people pay tax” argument? If we were to raise taxes on businesses by some number, let’s say 20% of revenue, would you not expect to see prices to the consumer go up?

  54. Good choice.

    Odd cure for inflated housing and too much debt… more inflated housing and more debt?

  55. How about we do something simple, like getting the government and my tax money out of the housing business, since they screwed up the market to begin with. Let the real estate fall to the unsubsidized level it should be. Quit dragging out the pain and running up my grandchildren’s IOU.

  56. I assume then you want to repeal the home interest and property tax credit – or is only some subsidies that should be repealed? And for commercial real estate, we can start talking about depreciation schedules and 1031 exchanges.

    Remember, this was designed to stop a steep decline in house prices that was caused by the government’s failure to regulate the financial industry, impacting those of us who did nothing to cause the problem. So government tried to address that. We can argue on the efficacy of the policy, but real estate has been subsidized for a VERY long time.

    Letting prices fall to the “unsubsidized level” would probably result in a longer crash and more damage to those of us on the sidelines.

    The “let nature run its course” theory is like refusing to take medicine with negative side effects so you can retain the right to infect the entire town.

  57. I assume then you want to repeal the home interest and property tax credit

    Of course. The housing interest tax deduction is among the more stupid policies our government ever enacted.

    Some people say it subsidizes owning a house. Very noble. But of course, it actually does no such thing; it subsidizes being in debt. Gee, whose interest does that serve?

    Including the “property tax deduction” in the same sentence is a deliberate attempt to confuse the issue. State taxes in general are tax deductible and that has nothing to do with this discussion.

    Say, pebird, you wouldn’t happen to work in the finance or real estate businesses, would you?

  58. Well, sales taxes are not deductible (actually, you can choose state income taxes or sales tax) – the government has been reducing what type of interest and what kind of taxes that can be deducted – you used to be able to deduct credit card interest. Basically, the only way to itemize deductions for “middle-class” taxpayers (without a personal catastrophe) is to own a house.

    So, obviously the federal tax code is seriously weighted toward home ownership – or should I say mortgage ownership. You can make a strong argument that as middle-class tax deduction options are limited to homeowners, this increases home prices artificially, both by increasing demand and by providing a permanent subsidy of which sellers are fully aware.

    This is a very different point, though from arguing that a temporary targeted subsidy to slow a sharp decline in price will raise prices for everyone. Or that the government should never subsidize industries, even poorly run or corrupt industries.

    Now, the argument that by having a temporary subsidy there is a risk it will eventually turn into a permanent subsidy is certainly valid.

    I’m not in the FIRE sector, just a hack trying to figure out what’s going on.

  59. Good analysis…here is another reaons it is bad…
    The credit for first time homebuyers is hammering the rental market, and the construction market for multi-family homes.
    It is hardly a coincidence that in the third quarter, the rental vacancy rate jumped to an all-time high of 11.1% (data start in 1956), and that construction of multi family homes has nearly ground to a halt (multi family starts in September fell to an 89,000 annual rate—the second lowest monthly number ever (the lowest reading ever was the August 2009 (87,000 units—annual rate)—data start in 1959.
    Housing prices may be dropping, but property values for appartments are falling—according the Moodys/REAL Commercial Property Price Index (CPPI)
    The FDIC closed nine banks on Friday—to bring the total for the year to 115—but the wave is just starting to build. Many of these banks are regional banks saddled with commercial real estate loans that have soured—and many of these loans are backed with residential multifamily loans. The credit will add to the list of failed banks….

  60. Where I live, it costs 6% of the sale price to sell your current house and buy another one – the realtor costs. For a $100,000 house, you just about break even with the tax credit. For higher priced houses (which has got to be almost all of them) it still costs you money to sell and buy another one.

  61. You are full of Sh%t. I have only made 2200 this year. It costs me 1100 a year in realtor dues just to WORK. We do not get the full commission. Sometimes it is spit 4 ways…Go FIGURE THAT ONE. I work 3 jobs.

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