Critics of the recent federal housing tax credits point to three major flaws in the calculation of the credits’ “success”:

  • a majority of the homebuyers who used the tax credit would have bought homes in the immediate future without the housing tax credit, thus the credit did not organically create as many sales as reported;
  • thousands of individuals who received the tax credit were not eligible to receive it (the first two iterations of the tax credit did not even require proof of the purchase of a home); and
  • homebuyers who were lured into the housing market by the tax credit were simply poached from the pool of future homebuyers, i.e., the tax credit merely robbed Peter, the future-Homebuyer to pay Paul, the present-Homebuyer.

first tuesday take: The costs of the tax credit for the real estate market depend on how many homebuyers can be created to replace those who have been plucked prematurely from the next wave of homebuyers simply to keep the sales volume up during the past year (and act as an attractive nuisance by bringing in speculators by the tens of thousands in California alone).

An increasing number of Baby Boomers are starting to retire and look for smaller houses closer to their grandchildren. They will leave behind them properties needing owners, who would have been those homebuyers who recently got into homes, had they not bought in ahead of schedule.

Thus, while the tax credits were useful in selling property to people who are already on the cusp of purchasing, they did not organically grow homebuyers to replace the tenants-by-nature that existed before and are no longer buying. The tax credits merely deferred the cost of creating homebuyers and artificially drove up prices. The wealth (down payment) required to firmly root a homeowner to his property and protect him against the inevitable ups and downs of cyclical real estate prices cannot be supplanted by gifts of tax credits politically engineered by the sellers most likely to have benefited – builders and real estate owned property (REO) lenders.

Those individuals who euphorically jumped on the tax credit as a major inducement to purchasing a home are merely riding high on the wave of tax avoidance, instead of striding purposefully towards the greater responsibility of owning and maintaining a home.

Another key factor in the sought-after real estate recovery is consumer confidence. When borrowers are ready, willing and able to purchase property, when they are no longer reticent about their ability to save a big enough down payment, and when they are secure that banks will offer them reasonable home loans on terms that do not mask the underlying risks, they will then start to buy homes again. Give them a couple of years to settle down. [For more information on housing and consumer confidence, see the May 2010 first tuesday article, Homebuyers feel ready and willing to buy, but not financially able.]

A subsidy is meant to bridge the difference between what was and what is to be: the problem with this particular set of tax credits is that they have built a bridge to nowhere. The gap left by the real estate bubble implosion that needs to be bridged will need the force of jobs, not merely tax credits, to see it reach the other side. The government has always been the employer of last resort when businesses do not employ, and it has not yet stepped in to fill the gap. Thus, the bridge is yet to be built.

Re: “Home Tax Credit Called Successful, but Costly” from the New York Times