The first-time homebuyer tax credit is "an extremely ineffective stimulus," which, like the $700 billion Troubled Asset Relief Program (TARP), "mainly rewards the very people who got us into this mess. It’s a futile attempt to blow just a little bit more air into the real-estate bubble."
Those views — put forward Tuesday in an opinion piece by MarketWatch’s Washington bureau chief, Rex Nutting — may reflect growing public sentiment against additional taxpayer-funded measures to stimulate the economy.
"The bubble pattern has to stop somewhere," said one typical reader comment on Nutting’s commentary piece. "It was a nice ride. We have to give the economy a chance to heal and stand on its own. D.C. needs to get out of private sector."
Nutting called real estate "the most coddled industry in America," and knocked the tax credit as "a windfall" for "the legion of middlemen" including real estate agents, bankers and title insurers who "earn thousands of dollars every time a home changes hands."
The Internal Revenue Service has estimated 1.4 million people have claimed the tax credit, and the National Association of Realtors estimates that as many as 350,000 sales this year are a direct result of its availability.
That means most people who claim the tax credit would have bought a home anyway, Nutting says, meaning the cost of each sale actually generated by the tax credit is surprisingly high.
Nutting cites an estimate by Ted Gayer, co-director of economic studies at the Brookings Institution, that an extension of the existing tax credit through June 30 would cost taxpayers $258,000 for every additional sale that wouldn’t have occurred without the tax credit.
Gayer’s "back-of-the-envelope" analysis begins with the Joint Committee on Taxation’s estimate that the seven-month extension of the tax credit would cost taxpayers $16.7 billion.
Gayer increases that amount to $19.6 billion. He then builds a "price elasticity" formula, which assumes that if the tax credit reduces the homebuyer’s cost by an average of 4 percent it should boost housing sales by 2.6 percent.
After another adjustment to take into account that some homebuyers won’t qualify for the credit because of income restrictions, the formula estimates that extending the tax credit into mid-summer 2010 will generate only 69,000 additional sales — "a poorly targeted subsidy," Gayer concludes. …CONTINUED
That’s a far cry from industry estimates of the tax credit’s potential to stimulate home sales. Some other economists have questioned the effectiveness of not only the first-time homebuyer tax credit, but the Obama administration’s "Cash for Clunkers" incentives for new car purchases.
Such programs have been popular with consumers and the industries they have helped, however, and Nutting is not alone in his view that Congress "almost certainly will cave under the pressure" and extend the first-time homebuyer tax credit.
Leading Democrats who have backed an extension include House Speaker Nancy Pelosi, and Senate Majority Leader Harry Reid. Senate Banking Committee Chairman Chris Dodd, D-Conn., said Tuesday that he will back a proposal by former real estate broker Johnny Isakson, R-Ga., to extend the tax credit through the end of June.
The Obama administration says the tax credit has had a positive impact, but isn’t saying where it stands on the issue.
Testifying before Dodd’s committee at a hearing Tuesday, Secretary of Housing Shaun Donovan said he was aware of the "strong support in Congress for doing more to support the housing market," including extending the credit.
"At the same time, I am mindful that these proposals can be very expensive, especially at a time of significant budget deficits," Donovan said.
Pressed further by the Senate Banking Committee’s ranking Republican, Alabama Sen. Richard Shelby, Donovan dismissed the suggestion that letting the tax credit expire would derail an economic recovery.
"If we didn’t pass the tax credit, would houses go into a … downward tail spin?" Shelby asked. "Some people say they would."
Donovan said that his own view "is that there are a number of different dynamics happening in the market, and many of those are regional dynamics."
In general, Donovan said, the tax credit "has been a positive force in the market, and that the end of the tax credit would have some negative implications for the market. But, I do not believe, based on all of the other actions that we’re taking … that a catastrophic decline would be a result of the end of the tax credit." …CONTINUED
Donovan said he agreed with Shelby that housing must play a central role in an economic recovery, and that the administration’s actions in keeping interest rates low and maintaining the Federal Housing Administration’s position as "an important force in the market" demonstrated that belief.
In Nutting’s view, one problem with the credit is that most first-time buyers are presumably moving out of an apartment — in other words, the sale of a home means a vacant apartment.
"The housing problem in America isn’t that home prices are falling — it’s that there are so many vacancies that prices must fall," he writes.
In his testimony, Donovan said rising apartment vacancy rates and delinquencies on mortgages backed by multifamily properties are "a source of considerable concern at HUD," as they threaten not only neighborhoods where those properties are located but the regional and community banks that financed them.
Testifying on behalf of Realtors at Tuesday’s hearing, NAR Vice President Ron Phipps said that if 5 percent of the pool of 16 million renters who can afford to buy a median-priced home can be nudged into buying a home through the tax credit, that would result in 800,000 additional home sales.
Phipps cited NAR estimates that each home sale generates approximately $60,000 in additional economic activity — and warned of the consequences of letting it expire. The housing market remains fragile, he said, and high unemployment rates could set another round of foreclosures in motion.
"If foreclosure rates were to spike again, inventories could become bloated again," Phipps said. "Incentives are still needed to keep the market moving."
In his commentary piece, Nutting questions why Republicans like Isakson, who opposed passage of the economic stimulus bill in February, are now "the main supporters" of the homebuyer tax credit. Republicans, he complains, "said the stimulus would not be effective. They said the government was picking winners and losers and distorting the marketplace."
Now, Nutting says, Republicans "all want to throw taxpayer money at real estate agents, mortgage bankers, title agents, escrow agents and real estate attorneys, as well as homebuyers and sellers."
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