Yahoo Finance asked this question about the home buyer tax credit yesterday, "Should it expire?" Short answer: Yes! [Thanks L!]
Now while the Yahoo article gives a number of dumb reasons for letting the program expire [The panic is over, things are "normalizing", the usual.] they have a couple of good reasons too.
For one, this is continuing some bad lending practices:
For example, some state housing agencies are allowed to provide second mortgages to buyers who don’t have enough money for a down payment so that they might "monetize" the tax credit and get the cash up front. Down-payment assistance is considered by many to have contributed to the crisis because it helped people buy homes they couldn’t really afford. Anyone who doesn’t understand that it’s a bad idea to push people into buying houses when they’re not ready to hasn’t been paying attention for the past two years.
Two- people might come to expect it:
If a tax credit – or any other economic benefit – sticks around long enough, people start feeling entitled to it, even if it was originally supposed to be temporary. In academic literature this is called the endowment effect. Taking away such a program once it’s ingrained can be a monumental political challenge. It’s not just that expanding the home-buyer tax credit would cost $50 billion to $100 billion this year. It’s that it could easily wind up costing that every year.
Three- taxpayers are paying a lot for very little return:
According to the IRS, 1.4 million homes have been bought since the credit’s inception; the National Association of Realtors gives a somewhat higher figure of 1.8 million to 2 million. (Either way, the program is already going to cost about $15 billion if it winds down as planned, according to the Associated Press .) And yet, according to the NAR’s own math , the tax credit was the make-or-break factor in only 350,000 of those sales. The National Association of Homebuilders, another industry group lobbying to extend the credit, places this figure even lower, at 150,000 . In other words, the vast majority of homebuyers would have signed on the dotted line even without the government’s incentive.
As any marketing professional knows, you don’t measure a campaign’s success by how much it costs but by how much it costs per person to persuade consumers to change their behavior. As the observant bloggers over at Calculated Risk have pointed out , when you divide the number of “conversions” (that is, people who bought a house only because of the tax credit) by the total amount spent on the program, the numbers look very different. Now, instead of the program costing $8,000 per buyer, it costs $43,000.
We could go on- but the tax credit shouldn’t. Here’s hoping legislators do the right thing [for a change] and let the silly thing die.
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i would add a 4th point to say that “buyers” are paying a lot for very little return as well. I know a couple in chicago that are scrambling to make sure they get into a condo and close on it prior to nov 1. they are looking in the 250-300K range, and, of course, have a realtor pushing them because these condos “were going for 400K 2 years ago…what a deal!!” so let’s say they buy one for 275K and they get the 8K credit. my math says the credit saved them a bit less than 3% of the price. i’m pretty sure if they weren’t in such a hurry to get the credit then they could hold out and negotiate more than a 3% drop in an asking price. the credit entitlement is another good point. one of the goals was to boost purchases this summer. if it’s extended then how many potential buyers (swayed solely by the credit) will just assume the credit will be here for a long time…maybe even increase to 10-12K??? it will become no incentive to buy soon at all. it will just be one more taxpayer subsidy in the form of a credit. it’s why we’ll never loose the mortgage interest deduction, or the earned income credit….they’ve been around for so long that it’s just become a permanent part of the tax code.
Now, instead of the program costing $8,000 per buyer, it costs $43,000.
Of course, the Realtors get more than $8,000 on the average sale – so you figure, the buyer gets an $8,000 benefit, the Realtor gets $12,000 (using a roughly $200k average home price), and the government is only wasting 50% or so of the money, assuming you count cash payments to their campaign contributors as “waste” too (and I assure you no politician or Realtor thinks that!).
Er, I meant assuming you don’t count them as waste.
That’ll teach me to proof my rants…