Here Comes Trouble: Stories from My Life

"Outstanding…Moore Triumphs! Publishers Weekly

Mike & Friends Blog

Dean Baker

Dean Baker is co-director of the Center for Economic and Policy Research

February 14th, 2012 12:03 AM

Policy Follies in the Housing Market: The First-Time Homebuyers Tax Credit

The right is very good at making progressives pay for their mistakes. They still trot out failed programs from the '60s as a warning of the risks of wrongheaded liberalism.

Unfortunately, the left cannot hold a grudge the same way; otherwise the folks who started the war in Iraq and allowed the housing bubble to grow out of control would be hiding under rocks instead of holding positions of power. But this crew gets amnesty not only for its big blunders; it also can count on a no-blame policy for even more mundane screw-ups. The first-time homebuyers tax credit is one such case.

The basic story was fairly simple. The first-time homebuyers tax credit was put in place as part of the stimulus package that Congress approved in February of 2009. The credit gave 10 percent of the purchase price of a home, up to $8,000, to first-time homebuyers or to people who had not owned a home for at least three years.

The credit was not part of the stimulus package proposed by President Obama. It was inserted as an amendment to the bill by Johnny Isakson, a Republican Senator from Georgia who had worked in the real estate industry for more than three decades before turning to politics. Isakson was able to quickly get a large number of Senators from both parties to sign onto his proposal and President Obama indicated that he would not oppose it.

The logic behind the tax credit was that it would provide a boost to the housing market at a time when prices were in a free fall. Prices were declining at the rate of 2 percent a month nationwide, and in some of the cities with the worse bubbles the rate of price decline was more than 3 percent a month.

The tax credit was explicitly intended to be temporary. It was initially scheduled to end in November of 2009, but was later extended to April of 2010. This was supposed to give people an incentive to buy a house right away, rather than waiting with the hope that prices would fall further.

The credit had its intended effect. There was a big surge in buying before the initial credit was scheduled to end (people did not know it would be extended until just before the expiration date), and then another huge surge in the spring of 2010 as buyers rushed to beat the end of April deadline.

This ended the plunge in house prices, with prices actually showing modest price increases in the late summer and fall of 2009. They remained stable through the expiration date of the extended credit.

However, there was a simple logical problem with the response to a credit of this sort. Very few people are going to buy a home who would not have otherwise because of an $8,000 credit. Relative to the purchase price of a home and related financial commitments (e.g. maintenance, property taxes etc.), $8,000 is not much of a consideration.

What a credit like this can do is to cause people to move an intended home purchase forward. In other words, people who might have otherwise bought a home in the second half of 2010 or 2011 could be persuaded by an $8,000 credit to buy their home in 2009 or the first half of 2010. The result is that the demand for homes would be expected to plummet after the expiration of the tax credit.

This is exactly what happened. Home sales fell by almost 40 percent in the months after the expiration of the tax credit. And with the collapse of the demand side of the market, house prices resumed their decline. By one widely used measure, home prices at the end of 2011 were more than 7 percent lower than they had been at the peak reached with the tax credit.

Of course not all housing markets were affected equally by the tax credit. The lower-priced homes in the less-expensive markets saw the biggest impact. This is for the obvious reason that first-time buyers are likely to buy less expensive homes and an $8,000 credit will have more impact on the price of a $100,000 home than a $400,000 home.

In these less-expensive markets the impact of the ending of the tax credit was truly disastrous. For example, in a year and half prices for homes priced in the bottom third of the market in Minneapolis have fallen by almost one-quarter. In Atlanta prices in the lower portion of the market have fallen by more than half. Similar stories could be told in many other cities.

This means that in effect the government persuaded many people with a $8,000 tax credit to buy a home on which they may have lost $40,000-$50,000 in less than two years. This is incredibly foolish policy.

If this policy had been proposed by liberals with the idea of helping the poor, its failure likely would have been a huge political issue in the 2012 election and likely for many years beyond. After all, the government spent somewhere between $15 -$20 billion on a policy that ended up hurting the people that it was intended to help.

However, this was a policy that was pushed by the real estate industry, ostensibly to promote homeownership. As a result, it would almost be viewed as unpatriotic to call attention to its failure. One result of this bias in policymaking is that we are likely to see many ill-considered policies along these lines in the future.

We also will continue to see a pattern whereby every failure of a policy designed to help moderate-income people is a political albatross on its proponents for decades, while the failures by the right are quickly swept under the rug. Is it any surprise that with a game played by these rules the country continually drifts rightward?

You must log in to comment.

You must be logged in to leave a comment. Log in | Register

My father, Francis (Frank) Moore, passed away this morning a few months shy if his 93rd birthday. He was a great dad I am blessed to have had him in my life. I...

Apr 20th
2:58 AM
Read More

Time to put the cuffs on Chris Christie -- not for the bridge scandal, but for this: Chris Christie's $300m pension proposal broke state anti-corruption...

Apr 18th
7:31 PM
Read More

George W. Bush Debuts New Paintings Of Dogs, Friends, Ghost Of Iraqi Child That Follows Him... www.theonion.com President Bush has a new hobby -- painting! --...

Apr 17th
7:28 PM
Read More

Big new story from David Sirota and Pando on top Christie adviser and appearance of corruption at New Jersey's pension fund: REVEALED: Gov....

Apr 17th
12:41 PM
Read More

FBI Uncovers Al-Qaeda Plot To Just Sit Back And Enjoy Collapse Of United States www.theonion.com WASHINGTON—The FBI announced today that it has uncovered a...

Apr 15th
3:28 PM
Read More

Revealed: Rahm Emanuel's top donor bought stock in Marriott just before it was awarded huge contract pando.com As schools are closed and pensions cut,...

Apr 9th
2:00 PM
Read More

I'll be at First Time Fest today in New York City at the screening of my first film, Roger & Me. Loews Village 7 at 12:30 pm. Come see it on the big...

Apr 5th
9:48 AM
Read More

Revealed: Rahm Emanuel cuts public pensions, diverts money to benefit campaign donors pando.com If you've read the financial news out of Chicago the last...

Apr 4th
2:19 PM
Read More

Please take a moment today to think of Casey Austin Sheehan, son of Cindy and Patrick, who was murdered by U.S. foreign policy in Sadr City, Baghdad ten years...

Apr 4th
2:00 PM
Read More

ICYMI - I've joined this "thunderclap" to support the Connecticut legislators who voted yes on last year's Act Concerning Gun Violence...

Apr 3rd
7:38 PM
Read More

I've joined this "thunderclap" to support the Connecticut legislators who voted yes on last year's Act Concerning Gun Violence Prevention...

Apr 2nd
8:27 PM
Read More

I am opposed to the death penalty, but to every rule there is usually an exception, and in this case I hope the criminals at General Motors will be arrested...

Apr 1st
3:55 PM
Read More

How Long Some in the US Will Survive Under New Health Law ...by Donna Smith www.michaelmoore.com Those who must access care to live and can afford it are not...

Mar 31st
10:13 PM
Read More

Last night, The Good Wife on the East Coast started 40 minutes late due to the overrun of the NCAA basketball game. If you had your DVR set for the show, you...

Mar 24th
5:41 PM
Read More

Watching films today, looking for the ones I'm going to pick for my film festival this summer. I (and a whole bunch of others!) have this thing we put on...

Mar 23rd
4:48 PM
Read More

When the U.S. Health Care System Keeps Killing, Who Cares Enough to Fight? ...by Donna Smith www.michaelmoore.com We have largely forgotten that people are at...

Mar 21st
5:56 PM
Read More

Tell the White House not to give up on Dr. Vivek Murthy's nomination as Surgeon General despite the ferocious opposition from the NRA: Don't give...

Mar 21st
5:38 PM
Read More

This criminal would never see a jail cell, nor would his cronies. In fact, they'd later be rewarded with re-election: Presidential Address on War with...

Mar 19th
9:40 PM
Read More

The crime of the century -- our invasion & slaughter in Iraq -- started 11 years ago tonite in this 7pm (ET) hour, March 19th, 2003: CNN Coverage of...

Mar 19th
9:08 PM
Read More

Washington’s Back-to-the-Future Military Policies in Africa ...by Nick Turse www.michaelmoore.com Nick Turse is an award-winning journalist, historian,...

Mar 17th
4:59 PM
Read More

"I think democracy is the most revolutionary thing in the world." -- Tony Benn, 1925-2014 Tony Benn in 'Sicko'

Mar 14th
10:07 AM
Read More

RIP Tony Benn, one of the UK's greatest leaders: Tony Benn, veteran Labour politician, dies aged 88 www.theguardian.com Former cabinet minister died at...

Mar 14th
9:53 AM
Read More

Please read this important story from K. Ford K.: Am I the Face of the New American Middle Class? www.huffingtonpost.com I began to feel I had slipped so low...

Mar 13th
2:24 PM
Read More

Yesterday Dianne Feinstein revealed that the CIA has been spying on the Senate Intelligence Committee. This is all about the report the committee has produced...

Mar 12th
6:48 PM
Read More

Health Care for All Colorado has brought Mercy Killers, a show written and performed by Michael Milligan about our murderous for-profit healthcare system, to...

Mar 10th
1:08 PM
Read More

Health Care Dramas that Sting and Why We Have to Watch ...by Donna Smith www.michaelmoore.com The realities Milligan has written into the show cut deep into...

Mar 10th
1:02 PM
Read More

Did you know the Lehrer Newshour on PBS has been produced for 20 years by a company owned by conservative cable billionaire John Malone? Me neither. After...

Mar 7th
8:39 PM
Read More

Mr. Obama, if int’l law is so damn crucial . . . | RootsAction.org act.rootsaction.org The Russian intervention deserves criticism. But let’s be clear. The...

Mar 6th
1:21 PM
Read More

Enron billionaire John Arnold thinks everyone should believe him when he says we've got to cut pensions because he's so incredibly rich: John...

Mar 5th
4:20 PM
Read More

Subscribe to Mike's Blog RSS

Click here to suggest an article

Mike's Blog

See More Blogs

Vew the archives

View older articles