Are Home Buyer Tax Credits a Mistake?



Original Post Date: August 25, 2010

By: Nick Timiraos

Tuesday’s dramatic plunge in home resales for July begs the question: Were the tax credits worth up to $8,000 for home purchases bad policy?

Sales of previously-owned homes, after a good run in March and April, slid in June before crashing in July. Sales last month were down 26% from one year earlier and 27% from June.

Clearly, temporary tax credits succeeded in getting buyers to change their behavior. But once the tax credits disappeared, so did the buyers. “Why would you have signed a contract in May and not in April when you could have gotten an $8,000 tax credit?” says John Burns, a housing consultant based in Irvine, Calif.

What’s less clear is whether stimulus has done anything else to change demand. While mortgage rates continue to fall every week into record territory, the expiration of tax credits shows that housing demand is not much better than it was 18 months ago, when the market was in freefall.

Some analysts say that even if the tax credit has simply shifted demand around, the tax credit did help to stabilize the market when the patient—the banking system, the economy, home-buyer psychology—was in the greatest need of help.

Mr. Burns says there are signs that sales will ultimately revive, as long as the economy continues to add jobs. “The further away we get from April 30, [when the credits expired] the more we’ll see natural home-buying demand come back,” he says.

So how bad was the pay-back effect of the tax credit? A number of data points from the National Association of Realtors shows that—surprise!—markets where an $8,000 tax credit had the biggest bang for the buck were hit the hardest by the expiration.

Sales of homes priced between $100,000 and $250,000, for example, fell by 35% in July from one year ago, after posting year-over-year gains of 7% in June. The Midwest was particularly clobbered, with sales down 47% at that price point.

Sales of homes priced from $250,000 to $500,000 were down by 28%, and homes between $500,000 and $750,000 were down 13%. Homes from $750,000 to $1 million fell just 7%, while homes above the million-dollar mark were up 6%.

To be sure, the high end is certainly not immune to the current stall, and more foreclosures moving up the price-chain will keep that market under lots of pressure. The NAR data is positive because it’s making a comparison to one year ago, when tax credits were juicing the low-end of the market and when the high-end was completely stalled out. So July’s decent-sounding high-end sales are being measured against terribly weak year-earlier levels.

The tax credit could have other data-distorting effects.  Median home prices, for example, could continue to rise as the mix of homes shifts to higher price points. If there are fewer sales, but more high-end sales, that could produce a continued uptick in median sales, even as sellers everywhere lower their prices. In July, homes priced above $500,000 represented 10.8% of all sales, up from 9.8% one month earlier.

So readers, what do you think: was the tax credit worth it, or did it serve up a big bowl of nothing?