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The Danger of Untargeted Home Buying Credits

Extending Untargeted Home Buying Credits Takes Us in the Wrong Direction

SOURCE: AP /Tony Dejak

A home with "Sale Pending" sign rests on the front lawn in Beachwood, Ohio, on August 21, 2009. A flood of foreclosures in hundreds of communities around the country is dragging down home prices, devastating neighborhoods, and causing enormous drag on the economy that can potentially overwhelm the recovery.

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Why not extend the $8,000 first-time home buyers’ tax credit when it expires in November? Everyone loves a tax break, especially one where you can get a quick check from the government. But the Obama administration could do better by targeting the credit to people and places that need it.

Continuing weakness in the housing market makes it tempting for Congress to simply extend this temporary program, or worse yet, open the floodgates to the $15,000 credit-for-all that some are proposing. Closer inspection of how the credit has worked, and what it has cost, should give lawmakers pause.

According to a recent National Association of Realtors study, only about 350,000 buyers out of the nearly 2 million who will claim the credit this year would not have bought without it, and some of those were just buying a few months earlier than they would have otherwise. In effect, four out of five buyers were handed $8,000 by other taxpayers for a purchase they would have made anyway.

We overspend because the credit is insufficiently targeted to provide purchase assistance primarily to those in need of the help. This credit effectively costs roughly $40,000 for every truly new purchase that would not have happened otherwise. Of course, some of the credit given to buyers who would have bought anyway will stimulate the economy in other ways—more cash in their pockets might lead to furnishings or redecorating that might not have occurred. Or it might simply lead to more cash in the bank for some, overpaying for a house by others.

But the uncertainty over how much incidental stimulus the credit actually produces just highlights a central flaw in its current form—it is largely untargeted toward the problem it was billed as solving. For a program that may cost $15 billion this year, and could top $50 billion if expanded as widely as some of its proponents suggest, we should insist on a vastly greater public benefit.

A flood of foreclosures in hundreds of communities around the country is dragging down home prices, devastating neighborhoods, and causing enormous drag on the economy that can potentially overwhelm the recovery. Yet the current credit goes to first-time homebuyers anywhere in the country, and is open to anyone making up to roughly triple the national median income.

But a tax credit available to young lawyers in relatively unscathed Houston making $150,000 or account executives in Seattle does nothing to help the parts of the country that truly need buying activity to turn around faltering economies. Home-buying assistance focused on areas of the country that have high levels of foreclosures but are capable of rebounding with a stimulus, such as Las Vegas, Miami, and Oakland, would do more to address the need of such areas hard hit by foreclosures, and would work faster than the current diffuse credit.

The political appeal of the tax credit comes nonetheless from its very broad availability and the perception by realtors and others in the housing industry that it can be a selling point to skittish buyers. Since Congress will undoubtedly be tempted to extend the credit, it should at least modify it to better achieve its original stimulative intent through better geographic and need targeting.

Just as mortgage interest deductions now phase out at higher price levels, a ceiling on the price of eligible homes as a way to target the credit would make sense. Similarly, if the strongest argument for the credit is the need to move stagnant home sales in hard-hit communities, then the credit should be concentrated to areas where local markets have high levels of foreclosures ans truly need stimulus.

The purchases homebuyers make on large appliances and renovations are generally more stimulative than the home purchase itself. If the credit continues serving income levels where the $8,000 is not crucial for the purchase, claiming the credit should instead require verification that such funds were spent on durable goods and capital improvements within three months of buying a first home.

It is undeniable that actions to break the downward cycle of foreclosures and neighborhood destabilization remain critical to the nation’s overall economic recovery. The current home buying credit has this potential, but as it currently exists, it takes too scattershot an approach at too high a cost. The country deserves better.

David M. Abromowitz is a Senior Fellow at American Progress focusing on housing policy and related federal and state programs and issues.

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