Should Congress Extend the Tax Credit for Home Buyers?

Congress is currently debating two bills that would extend the life of the $8,000 tax credit for first-time home buyers, which expires December 1. Is this a good idea? The answer recalls the joke about putting two economists in a room with a problem and getting three answers.

There's no question that housing remains a terrible weakness, with tens of thousands of foreclosed homes dragging home prices down in most areas of the country. The Mortgage Bankers Association forecasts foreclosure rates will continue to climb through late 2010, reaching its high point when unemployment hits more than 10 percent in the second quarter of the year.

Jay Brinkmann, the MBA's chief economist, forecasts new mortgages will total $1.56 trillion in 2010, down 21 percent from this year's projected $1.96 trillion.

What's worse is that the foreclosure problem continues to move up from subprime mortgages to affluent homeowners. According to Zillow.com, 30 percent of foreclosures are now in the top third of local home values, up from only 16 percent just three years ago. So the foreclosures pain is spreading to previously healthy parts of the market.

The $8,000 tax credit was adopted as part of the $787 billion stimulus package earlier this year with an eye on propping up the sagging housing market. It had pretty strict terms: buyers had to be first time home owners with incomes of less than $150,000 for couples and $75,000 for individual buyers.

Lawrence Yun, economist with the National Association of Realtors, forecasts a drop in home buying when the credit expires. "All we can say for certain is sales will decline when the tax credit expires because we are not yet on a self-sustaining recovery path," Yun said. "It also raises a risk of a double-dip recession."

With the credit due to expire at the end of November, Congress is scrambling to extend the plan through next summer or even expand it. Sen. Johnny Isakson, a Georgia Republican, who was the sponsor of the original credit, now wants to expand it to a $15,000 credit and expand it to all buyers. Congressional budget experts estimate this would cost an addition $16 billion.

The real estate industry is behind the extension, for an obvious reason: it's good for business. The National Association of Homebuilders, for example, wants the credit extended for an additional year and made open to all purchasers of a principal residence.

"We estimate that this would increase home purchases by 383,000 in the next year and help mitigate the foreclosure crisis by whittling down inventory at all levels of housing market, setting the stage for a full recovery," said Joe Robson, the homebuilders' chairman.

So, is this a good idea? Economists are plainly divided. Mark Zandi, economist at Moody's economy.com, thinks the credit should not only be renewed but also expanded to $15,000. He reckons this would increase 2010 home sales by 600,000. 'This in turn would generate $33 billion in additional real GDP, lifting growth in 2010 by 25 basis points. That would translate into $56,000 in real GDP generated for each additional home sale," Zandi says.

But Ted Gayer, co-director of economic studies at the Brookings Institution, is convinced the home buyer credit is a bad idea. "The subsidy is poorly targeted because it would give a credit to 5.5 million home buyers who would have bought a home anyway," Gayer says.

Gayer believes the expansion of the tax credit would generate 268,000 additional sales at a $323,000.cost per additional sale.

So is this a good idea? It's somewhat like the Cash for Clunkers program designed to aid the ailing car industry. It sold about 700,000 new cars, giving Detroit a measurable boost. But wouldn't have most of those sales gone ahead without the $4,500 credit? And didn't it just move sales up to this summer from this winter?

Whether you support the idea of an extended tax credit for home buyers depends a lot on where you stand on the concept of government priming the pumps of the economy to get things moving again after a big slowdown. For many people, the recovery is just too weak to take a chance at a crucial juncture.