The Wonk Room

How Congress Can Improve The Inefficient, Expensive Homebuyer Tax Credit

Momentum is building in Congress to extend and possibly expand an $8,000 first-time homebuyer’s tax credit that is set to expire on Nov. 30. The credit was created as part of the economic stimulus package passed in February, and the home builder’s lobby, along with realtors and scattered members of Congress (most significantly Majority Leader Harry Reid (D-NV)), are pushing for the credit, saying that it is a necessary part of economic recovery:

The National Association of Realtors said the main thing was to act quickly, given the time it takes to arrange financing and close on a home, and make the credit as robust as possible given the budget situation. “Still reeling from the most devastating downturn since World War II, housing is only beginning to gain the momentum needed to return to a stable market,” added Ken Gear, executive director of the Fix Housing First Coalition. “Unless the homebuyer tax credit is extended, we risk undoing all the progress that has been achieved.“

Actually, the jury is still out on how effective this tax credit is in aiding housing prices, but one thing is for certain: it’s wildly expensive. The credit has already cost $15 billion, more than twice its original estimate, and for that price, about 1.9 million homes were purchased that wouldn’t have been bought anyway, for a final cost of $43,000 per additional buyer.

But it gets worse. The National Association of Home Builders (which is very much in favor of extending and expanding the credit) calculates that an extension will only cause about 383,000 additional sales through 2010, which, at the expected $40 billion total price tag, breaks down to $104,400 per additional home sold. Talk about an inefficient use of money!

“Four out of five of the buyers were given $8,000 for doing something they were going to do anyway,” CAP’s Andrew Jakabovics told NPR. “That money could theoretically go towards foreclosure prevention and other housing market interventions that would be more effective.”

But since Congress seems pretty intent on going through with an extension (as Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities, said, the credit is “political apple pie“), the least it could do is place some meaningful restrictions on it, to target the credit in ways that will maximize its effectiveness.

First, any thought of removing the credit’s income cap (which prevents couples making more than $170,000 per year from claiming it) should be tossed aside. And instead of opening it up to anyone and everyone, as Sen. Johnny Isakson (R-GA) wants to do, the credit should be restricted to first-time homebuyers, buying an already existing home in an economically distressed area. Calculated Risk goes one step further, advocating that the credit only be open to people who were part of another household for the last year, and intend to form a new household (so the credit wouldn’t be available to all renters looking to buy).

At least restrictions like these would increase the chance that the credit does what it’s intended to do — stabilize home prices in areas that have been torn apart by foreclosures.