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Tax break for homebuyers?
I'm not sure I understand the proposal, but here is what the NYT says:
Like Arnold Kling, I wish to shift the economy out of housing, not into it again. I also believe that the supply of homes is relatively elastic right now. The tax credit will subsidize the new buyers without propping up the price of homes. Demand will go up, supply will go up, price will stay more or less on the same trajectory, and banks won't be any healthier. The subsidy goes to new home buyers and why should we be helping them above all others? Aren't they relatively wealthy on average? (Not that there's anything wrong with that.) Aren't some of them the dreaded "flippers" and speculators for that matter? (Can we really enforce the primary residence requirement?) Do we really want to push people into being less diversified and less geographically mobile in the labor market? And here's Alex's post from earlier today.
There's a whole other debate you could have on whether we should be encouraging people to buy outputs which are already produced.
So far I say boo to the Republicans. It could be I don't understand the proposal; if that is so please correct me in the comments. Here are further discussions of what is going on.
Posted by Tyler Cowen on February 4, 2009 at 11:04 PM in Economics | Permalink
Comments
It looks like there used to be a requirement that the credit be repaid, but that is out now.
www.baltimoresun.com/business/realestate/bal-re.harney25jan25,0,2870119.story
Does the credit get paid out at closing? Otherwise, somebody has to make a short term $15,000 loan.
If you find the text of the bill, please link to it.
Is there a recapture? I might sell my house to my adult son, then buy it back next year. Teach him to be a flipper.
Posted by: TomHynes at Feb 4, 2009 11:30:20 PM
I agree that more information is needed. Earlier iterations of this proposal (NAHB sponsored by the way) included a provision for buyers to monotize this credit at the time of purchase. I assume that means they can use it for a down payment. If so, then this is a back door route to no down loans and all that entails. There seems to be an addiction that's not breakable.
Posted by: Tom Lindmark at Feb 4, 2009 11:33:05 PM
I don't think you would find yourself at odds with many Republicans in being skeptical of this measure. Even arch Republican pundit Michelle Malkin has been vociferously agitating against the measure. It's a big rant but I think you are talking about the same thing?
http://michellemalkin.com/2009/02/02/sen-mcconnell-proposes-more-big-government-to-fix-big-government-debacle/
Posted by: A. F. at Feb 4, 2009 11:36:58 PM
Looks like Sean P. (a commenter on that post by Alex) may get his pony and flying car after all.
Posted by: RW Rogers at Feb 4, 2009 11:37:14 PM
"Like Arnold Kling, I wish to shift the economy out of housing, not into it again."
But this is only one aspect of what needs to happen, that is shifting the entire economy out of current consumption and into productive investment. The spending provisions of the stiulus are aiming to prevent this from occuring.
Posted by: Timothy at Feb 5, 2009 12:06:38 AM
It could be I don't understand the proposal; if that is so please correct me in the comments.
I think what they are trying to do is Keynesian. They aren't having people dig holes and refill them. But they are doing something to cause people to save less money.
Ordinary people are supposed to think the policy will work and make the economy better. Therefore they wont try to save money for bad times. Doesn't matter if the policy is stupid, as long as ordinary people don't know it's stupid.
I doubt many politicians think the stimulus bill will do anything. I also doubt they believe in economics. For them it's about perception and confidence. They are politicians after all. They probably want economists to back what they do and if they can't give helpful advice (easy answers) to not openly criticize them. (hint hint Tyler)
Posted by: Jason (the commenter) at Feb 5, 2009 12:26:48 AM
Why aren't we talking about job creation instead of housing? Shouldn't republicans be talking tax breaks to small business and $$ incentives to upstart business on a per employee hired. Municipalities should get 50/50 grants for business incubators, and for creating tax incentive enterprise zones.
Posted by: tonynoboloney at Feb 5, 2009 12:49:15 AM
I do think it will be hard to keep people from gaming the system, Sell the house to a family member etc.
In Detroit this could mean free housing plus a HD TV. If you have tax income to offset and want to live there. That must be at least a dozen people
Posted by: DanC at Feb 5, 2009 12:52:12 AM
The problem is that the Republicans have been playing chicken with Obama regarding the stimulus. Most of them are following the "I hope he fails" line which means attacking without a meaningful alternative. Obama should call their bluff and ask if not my bill what can you bring to the table? If this amendment is any indication, the answer is not much.
Posted by: james at Feb 5, 2009 12:54:07 AM
Dean Baker had a similar take on this really confusing piece of legislation:
http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=02&year=2009&base_name=senators_go_wild_approve_house
Posted by: Dilip at Feb 5, 2009 1:24:52 AM
It's easy to see why the Repubs are playing chicken with this bill. They're using the Dem tactic of stalling and trying to run it into the ground until the public gets mad/confused/apathetic and it's such a mess that nobody will care and gridlock will ensue.
I think also the Republicans know that there's only a couple of taxes left that they can cut for folks, and they know the Dems will never agree to a payroll tax cut or holiday.
Also, I'm here in California, and with the amount of short sales going on and shenanigans that have already happened, there could be people getting 1099'd by the IRS after closing short and then picking up this credit when they get something new. So what the heck?
Posted by: Chris at Feb 5, 2009 1:44:56 AM
I think we should let everything go to hell,dont bail anyone out. Buy only american products, and start a new branch of gov to kick all illigials out of the countery this would create jobs.Live (like you are bankrupt) only buy what you need to get by.
Posted by: michael Evans at Feb 5, 2009 1:53:57 AM
This proposal is endorsed by stimulus expert Mark Zandi. That should be good enough, right? An expert is an expert.
If we think that the problem is that houses are in the wrong hands (people who can't afford them), and don't want to give money directly to those who made bad decisions, then I guess there's some argument that moving houses to buyers more capable of affording the houses (if only after a taxpayer subsidy) makes sense, and the subsidy increase the supply of buyers even if it doesn't raise prices. Which helps the banks by eliminating the bad borrowers.
Of course those of us who think the problem isn't affordability will think this doesn't work at all. And even if the measure led to a dollar-for-dollar increase in housing prices, it's unlikely it would make a significant difference to the calculus of potential defaulters in CA or FL or NV. Housing prices are down significantly more than $15,000 in those markets (at the median). For many the choice would still be to walk away.
Moving first time buyers into the housing market in the present market probably doesn't do much to increase the lack of diversification/mobility. In many communities--mine, for example--there is a relatively small backlog of new homes, and most aren't affordable to typical first time buyers. In most cases the eligible purchasers would buy from an existing owner, freeing one person to move or diversify.
All in all, another bad idea. This seems yet another targeted tax cut which is meant to produce political support, not an economic response. If they want political support, why not do 2x last year's? I'd grouse less about this mess if I got a big check. Less being the operative word. I'm easy--I got $2700 last year (and spent it!), and would happily do the same with $5400 this year. And the NY Times today had a bit suggesting I wouldn't be the only one spending.
Posted by: Thomas at Feb 5, 2009 1:54:06 AM
Let's assume 1 in 30 Americans decided to buy a house as a result of this tax break. That would help slow or stop the decline in housing prices at a cost of $15 billion. It seems like a measure with much more punch than anything else that's been proposed so it and it would satiate some of the need politicians have to feel like they're "doing something" about the recession at a really low cost.
On the other hand, I am genuinely curious as to whether one loses the tax benefit if one sells one's house. I could buy the deed to my neighbor's house and he could buy the deed to mine. Then we could repeat the process. Would we each get $30,000, $15,000 or nothing at all? It's a problem that's very easy to solve; I hope they have.
Posted by: David Ong at Feb 5, 2009 1:56:51 AM
"Like Arnold Kling, I wish to shift the economy out of housing, not into it again."
And let's kick the government out of housing while we're at it.
Posted by: Matt at Feb 5, 2009 1:59:35 AM
I work for a major building-supply manufacturer and am scheduled in a day or so to get up-close and personal with this recession. Before I learned about the $15,000 tax credit, I was convinced that the only thing coming from the government that would help my industry would be a direct and sizable incentive to build or remodel. Direct because most people have little reserves and sizable because many added-values from improvement have been evaporated by the market.
Like any epidemic of this size, it has affected most of the socio-economic spectrum. It seems to me that money invested in any conventional place: home, market, business, disappeared faster than a pallet of cash in Baghdad. I'm surprised that in my lifetime I've seen the irrefutable, "always better to save and invest" put to the challenge.
For some time now, the dilemma has been reminding me of Mary Poppins where the bank is trying to get the tupence from the children who want to frivolously give it to the poor who will waste it on the pigeons. I'm thinking, maybe we tried the banks, now it's time for some alternatives. I recall the solution in the film was to go fly a kite.
Posted by: Dave Katz at Feb 5, 2009 2:50:37 AM
Why not kick the politicians out of government & soleve the problem once & for all. The root cause of this economic problem is geed coupled with deeption. Do you all get it yet? I think they all should go fly a kite! Remember the prophecys of those who once tended this land (note we do not belive in ownership, rather caretaking) Only after the last tree is cut down, and the last river has been poisoned & the final fish caught.. Only then will you understand that money is valueless & cannot be eaten. - Cree Words of Wisdom - We Wait for the Circle
Posted by: Native American Apache/Blackfoot at Feb 5, 2009 4:04:54 AM
Any purchases in the housing market have many advantages
1) They will force banks to recognize losses on loans, enhancing future transparency of bank balance sheets.
2) Since the securitization market is dead, they will replace securitized debt with loans held in portfolio. This will allow for better future flexibility in workouts.
3) They will create collateral in the home (versus no money down). Whereas now owners who are underwater have an incentive to walk away, this creates fewer underwater owners who will have stronger incentives to stay in the home and pay off the loans.
The bill should still ensure there is no fraud or legal bypass of the intended legislation.
Posted by: John at Feb 5, 2009 6:16:09 AM
The Republicans did provide an alternative stimulus plan, so they are certainly not stalling or bluffing on stimulus. A good bit of economists also believe that stimulus today will have negative long-term effects as a government debt today will have to be repaid later which means in the mid-term lower government spending or higher taxes in exchange for today's stimulus.
Posted by: Sean at Feb 5, 2009 6:19:07 AM
The Republicans did provide an alternative stimulus plan, so they are certainly not stalling or bluffing on stimulus. A good bit of economists also believe that stimulus today will have negative long-term effects as a government debt today will have to be repaid later which means in the mid-term lower government spending or higher taxes in exchange for today's stimulus.
Posted by: Sean at Feb 5, 2009 6:19:33 AM
The Republicans did provide an alternative stimulus plan, so they are certainly not stalling or bluffing on stimulus. A good bit of economists also believe that stimulus today will have negative long-term effects as a government debt today will have to be repaid later which means in the mid-term lower government spending or higher taxes in exchange for today's stimulus.
Posted by: Sean at Feb 5, 2009 6:19:40 AM
i too was puzzled by this provision. first the $19B price tag made no sense. with 5M houses selling each year the price tag would be more like $75B. that's before fraud/gaming.
would this $15k end up going to the buyer or the seller? tough to know, but probably more to the seller. the buyer is going to get screwed, as the price is going to support a higher purchase price today whilst the price will certainly come down in the future in the absence of this support. this means more negative equity leading to more foreclosures etc. in the future.
on the other hand, it probably does count toward stimulus. the seller gets a higher price and the buyer gets a loan (ie is not required to realize his loss until later).
however, it's a strange provision. i don't get the idea that anyone really thought this through. especially the $19B number, that comes from absolutely nowhere. i don't understand why newspapers can't do simple math on this. or am i missing something totally obvious?
Posted by: babar at Feb 5, 2009 6:38:20 AM
Tyler: This is a stupid, populist provision-but the rest of the bill is worse.
You seem to not be thinking on the margin on this issue.
Posted by: Phil at Feb 5, 2009 8:02:30 AM
Pair it with a $20k excise tax on new home construction and it might work.
Posted by: FXKLM at Feb 5, 2009 8:25:36 AM
I think this is ridiculous but at least everyone is eligible, not just "first time homebuyers." With the demand and supply so out of whack, not including more and more supply as people are foreclosed on, adding $7500 or $15k to the mix isn't going to suddenly shift things substantially. Some people get some money, we all get more debt, and the end result is that we're still in the jam we're in. We moved the ground up a few feet closer but we're still falling.
Posted by: jim at Feb 5, 2009 8:35:54 AM
