More than 2 million homebuyers thought they were getting a great deal when they were offered up to $8,000 in tax credits in 2009.
But did the first-time homebuyer tax credit really help homebuyers? Not really, economist Dean Baker says in a recent study published by the Center for Economic Policy Research.
The credit mostly helped sellers and banks, as it lured buyers who ended up overpaying, he says.
"Essentially, the credit persuaded many people who might have bought a home in the second half of 2010 or 2011 to buy their home in 2009 or the first half of 2010," Baker says in the study.
Why is that problem? Because home values fell after the "credit-induced peak" in prices reached in the second quarter of 2010, he says.
The first-time homebuyer credit gave a tax credit of 10 percent of the home's purchase price, up to $8,000, to qualified buyers. The credit was initially offered in 2009 and later extended through April of 2010.
The idea was to spur home sales and stop the bleeding of a housing market where prices were plunging rapidly. It worked -- like a Band-Aid. Home prices actually rose a little as buyers rushed to beat the clock.
About 2.3 million people took advantage of the credit, according to the Government Accountability Office. The measure cost the government about $16.2 billion.
But once the government pulled off the Band-Aid, the bleeding continued. Sales plunged and prices followed.
The credit benefited sellers who were able to sell their homes at partially inflated prices, Baker says in the report. He adds that banks were helped, too.
"It was remarkable that the Federal Reserve Board, the Treasury Department, the Council of Economic Advisers and other top economic officials managed to overlook the largest asset bubble in the history of the world as it was growing," Baker says in the report. "It was even more remarkable that they continued to overlook it even as its collapse wrecked the economy and gave us the worst economic downturn since the Great Depression. If these officials had been paying attention, there would presumably have been more opposition to the first-time homebuyer tax credit."
Do you agree with Baker?
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