Should tax credits for homebuyers be extended?

Kijong Kim | June 23, 2010

The clock is ticking and right now first-time buyers have to close the deal in six days. The incentive is sweet: up to $8,000 from Uncle Sam. The Internal Revenue Service reported that $12.6 billion was credited to 1.8 million home buyers (the final toll will be higher as transactions in 2010 have not been filed yet, not to mention the inevitable fraud).

Calculated Risk, a highly regarded blog that tracks these matters, suggests that six months of inventory is normal in the housing market. For new homes, in May, the level rose to 8.5 months from 5.8 in April as sales plunged. Things are little better in the market for pre-existing homes; there we find 8.3 months of supply, in part due to the non-stop flow of foreclosures and short sales.

From the data, it seems that the tax credit program has stimulated the market, at least a little, and for awhile. My question to you is, should our uncle in Washington keep the program going?

Pros:

  • Propping up shaky home prices may encourage private spending and support aggregate demand.
  • Aiding the real estate market in lowering inventories may keep prices from falling further and generate some construction jobs.
  • Reaching a “normal” level of inventories may improve everyone’s expectations and thus create a virtuous cycle of self-fulfilling recovery.

Cons:

  • The tax credit program may condition potential buyers to wait for another round of subsidies, thus delaying the very purchases we most want to accelerate..
  • The temporary subsidy may not be enough to sustain a high volume of transactions, and inventories may rebound (unless higher demand fueled by economic recovery takes place miraculously). Multiplier effects of the subsidy may not be enough to get us to a self-sustaining market.
  • The program delivers benefits to people who can afford to buy home, and therefore is regressive. This regressivity implies high opportunity costs.

Comments


Leave a Reply

You can use these XHTML tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>