Tuesday, 23 March 2010

Hitting the Sweet Spot on the Homebuyer Tax Credit

The California Legislature just passed (and the Gov is sure to sign) an expanded $10,000 tax credit to first-time buyers of existing homes or any buyer of a newly built home that closes escrow after May 1. (The California tax credits will expire after $100 million has been awarded in each of the two categories.)

In doing so, they have given an unexpected gift to some buyers who were taking advantage of the federal homebuyer tax credit that expires April 30. How? The federal credit just required you to be in contract before April 30, but the home only needed to close escrow before June 30. The California credit is for any house that closes escrow May 1 or later, until the $200 million runs out. Putting a home under contract before May 1 and closing before June 30 appears to be the first-time homebuyer sweet spot.

I have a friend, “Susan”, who just signed a contract to purchase a home and is set to close escrow in mid-May. Susan was definitely going to purchase a home this year, but was induced to look a little harder before the end of April so she could take advantage of the federal tax credit. She was successful, and has just learned that she will be receiving an additional $10,000 complements of California taxpayers.

So, what is the effect of these homebuyer programs? Susan shifted her purchase forward a few months in time in order to pocket the Federal tax credit. She is now receiving an unanticipated $10,000 windfall from the state of California too. What was the stimulative effect we received for transferring $18,000 to Susan? Zero. Did it serve a societal social goal? No. As a first time buyer with a young family, Susan was already going to do very well buying into the market at this time regardless of the credit. Did it increase the housing stock (i.e. total wealth)? No, even if used to buy a new home, it is just moved the purchase up a few months in time.

Instead of current first-time homebuyers, we should provide assistance to people who were first-time homebuyers between 2003 and 2008, and are now hopelessly underwater. If we must throw taxpayer funds at the real estate market, we should be using these funds to keep these people in their homes if they have the income to afford their house at the current market price (and didn’t go crazy cashing in their equity). These are the young famiies that are the innocent victims of this mess, and we are just creating incentives for them to default and create all the external social costs on neighborhoods, property damage, and family disruptions that come alone with it. Preventing foreclosures like these produces a quadruple benefit of stabilizing the real estate market (which is good for home builders) AND avoiding property damage and neighborhood issues from foreclosures AND reducing losses to banks AND helping a family in need.

Instead, we give tax credits for buyers who are already benefiting from their market timing. I think it’s great to see people taking advantage of the more affordable housing, but I don’t know that a bonus payment is necessary for the fortunate ones who buy between May 1 and when these funds are inevitably exhausted in a few months. Of course, this approach does generate real estate commissions, so it has a strong lobby. And you can bet that lobby will be back again and again and again to continue pushing for renewing and expanding this latest real estate subsidy for a 3rd time, 4th time, and forever.

I am happy for Susan, and I am glad that at least one nice family I know is benefitting from the homebuyer tax credit give-away. I told “Susan” I wouldn’t embarrass her by using her real name in this blog post if she spent some of the $18,000 windfall buying me beer in a local tavern. That will also ensure that at least some of the funds stimulate the current economy.

Yes, I’m jealous and bitter because I don’t qualify for the tax credits (I am not underwater either) while my children will be bearing the brunt of next year’s education cuts. However, I think it would be hard to find an economist who would argue that these homebuyer credits are better for the California economy than keeping the $200 million in the budget to keep someone employed in a school next year.

Update: Roger Niello is my favorite member of the Assembly today.

The bill, AB 183, passed both houses of the Legislature by near unanimous votes. But one local lawmaker, Assemblyman Roger Niello, R-Fair Oaks, voted against it.
“I think it’s a lot of money in a deficit situation that doesn’t have the desired benefit,” Niello said.

About the Author

Ethan Jacob

Author & Editor

I am Ethan Jacob Executive Director of the Center for Business and Policy Research at the University of the Pacific, where I have a joint faculty appointment in the Eberhardt School of Business and the Public Policy Program in the McGeorge School of Law..

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