How much did the first-time homebuyer credit help the U.S. housing market? Not much.
The much ballyhooed tax break was touted as the best way to shore up the sagging housing industry following the bursting of the real estate bubble.
But a new paper by Jonathan Brogaard and Kevin Roshak, doctoral candidates at Northwestern University’s Kellogg School of Management, found that the tax credit had very little effect on the slumping housing market.
There was virtually no change in the quantity of homes for sale, according to "The Effectiveness of the Financial Crisis Housing Tax Credit Programs."
Instead, the researchers found that the tax credit had only a "fleeting influence … resulting in little more than a redistribution of wealth."
They examined different types of housing markets: stable and low-cost markets and more expensive markets or those with more volatile prices. They found that it was the stable housing sector that was more likely to be influenced by the credit.
But even there, the effect was short-term.
First a quick refresher of the various homebuyer credit options.
The initial program in 2008 was a no-interest loan for up to $7,500 that had to be repaid. The second iteration was part of the 2009 stimulus bill. That measure made the tax break a true credit, meaning it didn't have to be repaid, and increased the amount to $8,000. Then Capitol Hill expanded the credit beyond first-time buyers, offering a $6,500 credit for current homeowners seeking another residence.
Brogaard and Roshak reported that their main tests showed residential prices rising by $6,509 because of the tax credit, but within two months after the tax credit expired, house prices fell on average by $7,721.
When the larger $8,000 credit was available, home prices rose by about that amount, but subsequently dropped by $8,940.
The doctoral students' findings were "consistent with the tax credits temporarily shifting demand … but then contracting after the credits expire."
"The speed of these price movements is quick," according to the paper. "The price increase takes place largely within a month of the first large tax credit, and the price drop occurs predominately in the two months following the credit expiration."
The data also found no evidence of an increase in the quantity of homes. And worse news, Brogaard and Roshak found no evidence that any version of the credit helped potential sellers prevent foreclosure.
So essentially, when you look at what the credit did for the U.S. housing market, based on this evidence the tax break was a short-term wash.
The first-time homebuyer tax credit did, however, achieve a few things.
The credit's many changes and requirements confused and infuriated taxpayers.
It also ticked off the Internal Revenue Service, which is still having trouble processing the credit, especially the original $7,500 loan version.
And it secured housing industry financial support for the representatives and senators who voted to create the tax credit and keep it on books for longer than it should have been.
Those first two accomplishments were unintended (I hope!), but that last one was probably the main reason for the legislation in the first place.
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