Matthew Ferrara, Philosopher
 

Study says Housing Tax Credits Didn’t Work. Does Anybody Care?

>Some of us aren’t surprised the $8,000 housing tax credits didn’t work to increase demand, forestall foreclosures or create sustained prices stability. But the question now is: Does anybody care?

Video version of this blog:

Plenty of people predicted the First Time Home Buyer tax credits would not work – the first or second time. Now a study by Northwestern University’s Kellogg School of Management finds that they had little effect on volume of sales, and potentially worse, actually inflated prices for buyers during the same period. I’ll save you the time reading the 42 page paper, and quote the conclusions:

We find that quantity was unaffected and that prices rose only temporarily. The results showed no statistically significant difference in quantity. However, prices in affected housing markets rose on average $6,509 more than unaffected markets during the program. This price differential more than reverses, falling $7,721 after the expiration of the final tax credit program. The speed of these price movements is quick. The price increase takes place largely within a month of the first large tax credit, and the price drop occurs predominately in the two months following the credit expiration. [emphasis added]

So, prices went up (harming buyers) and then fell further after the credits ended (harming sellers) while demand remained flat. Not the same story told by the economist at the National Association of REALTORS December 2009:

An estimated 2.0 million first-time buyers have taken advantage of the $8,000 tax credit from February to November. Now with the tax credit extended till the middle of next year and also available to move-up buyers, I anticipate an additional 2.4 million home buyers qualifying for the tax credit. In total 4.4 million American households are expected to have benefited from the home buyer tax credit before the program ends in June 2010.

That’s a weird definition of “benefitted” but nonetheless, we can agree that nobody who claimed a portion of other people’s $22 billion dollars didn’t actually helped fix the housing market. As the Wall Street Journal notes in June 2011:

The Standard & Poor’s/Case-Shiller housing survey [showed] … that home prices fell another 4.2% in the first quarter. Prices have fallen for eight straight months, after the false dawn of 2009-2010, and average home prices are down to levels last seen in 2002. The Case-Shiller 10- and 20-city indices are back to the level of 2003. …. Since the housing market began to turn in 2007, Washington has tried to keep prices from falling with every policy gimmick known to politics: Foreclosure mitigation, more guarantees from the FHA, higher guarantee thresholds from Fannie Mae and Freddie Mac, Fed purchase of mortgage assets, and the $8,000 home buyer’s tax credit…”

Now, I won’t quote myself, but interested readers will note that I wrote here, here and here, that these gimmicks wouldn’t work while consumers were busy de-leveraging and jobs disappeared. What I will say, however, is that I’m concerned that the real estate industry went “all in” on the tax credits, got nothing out of it, and hasn’t got the message:

If you want the housing market to stabilize, stop messing with it.

That means abandoning organized efforts to block foreclosures with public money or forced buy-downs by lenders. It means being shocked by – not supporting – initiatives like the “Helping Responsible Homeowners Act of 2011” which would authorize Fannie Mae and Freddie Mac to let underwater owners refinance their properties without any loan-to-value limit, in the hopes they will spend their additional disposable income rather than save it. I thought REALTORS were all about creating equity

It’s not just the political efforts that need to stop messing with the markets. Everyday agents need to reconsider their desire for prices to rise. It’s a false paradox – wanting lower interest rates but higher home prices. Haven’t we learned that when we stimulate higher prices – from the original cheap lending bubble to the tax credits –  we create instability in the market? This is especially important since new data shows investors (usually buying with cash) are becoming major buyers in many marketplaces; A survey by MOVE Inc., the operator of REALTOR.COM, recently indicated that three times as many investors as traditional buyers are poised to buy homes in the next two years. Why would we want prices to rise and scare off that demand? (If your answer is the commission, you missed the point once again).

It’s time to let the laws of supply and demand, not demand and get subsidies rule the market. We’ve already prolonged the housing downturn for two, maybe three years longer than it had to be. It might even be argued that the onerous proposals inside Dodd-Frank are the result of these interventions: had the housing market been allowed to fall fast and stabilize sooner, maybe politicians would have only proposed dumb rules for the lending markets, and not dumber ones like 20%-downpayment requirements for real estate buyers. I can’t prove that, but I can pretty much say that just about everything we’ve tried so far – except letting supply and demand take their course – hasn’t worked. Today we got another study to prove it.

Now we just have to ask: does anybody really care?

  • Bbalduf

    Looks like 73% of voters in a recent Wall Street Journal poll agree with you. http://blogs.wsj.com/developments/2011/07/12/why-the-housing-tax-credit-failed/

  • Great find! Thanks!!

  • Ryan Olson

    Amen, brother! Rather than asking Congress to “First, do no harm.” It’s as if our NAR lobbyists are saying “Please Do (anything)!”. And now they want an extra (mandatory) $40 from me to continue this fool’s errand?!