The first-time homebuyer and move-up tax credits expire today. (And the purchase has to be completed before July 1). The tax credit was expanded and extended past its original expiration date of November 30, 2009 to April 30th. It's about time.
The first time buyer credit was for up to $8,000 and the move-up credit could go as high as $6,500. The idea behind the credits was to boost sales. However, at best the credits may have helped brake the downward momentum of the housing market--if that.
To be sure, the housing market implosion was the epicenter of the Credit Crunch and Great Recession. The federal government directed enormous resources at the home market. Besides bailing out banks, it nationalized Fannie Mae and Freddie Mac, opened the lending spigot at the Federal Housing Administration, established a mortgage modification program for troubled homeowners, and passed the homebuyer tax credits. The Federal Reserve also embarked on a $1.25 trillion purchase of mortgage-backed securities in an effort to engineer lower mortgage rates. (It has also ended.)
Much of the recent gains in home prices is attributed to buyers making a deal before the credits expired. But those sales--which haven't been exactly sizzling--probably would have happened anyway. The credit's deadline simply moved them forward by a few months or maybe a year.
Worse, the policy was geared toward propping up home prices, which is perverse. Artificially holding prices at above-market levels harms new potential buyers, from young adults starting their own households to immigrants putting down stakes in the American Dream. The subsidies wrongly delayed the inevitable home market price adjustment to excess supply in many markets across the country.
The market shift to lower values would have been much quicker and fairer without the credit. The best policy in this case is let the market work.
Longer-term, the Administration and Congress should start the process of culling the U.S. tax code of the many tax provisions that favor housing. In a modern economy it makes no sense for homes to get preferable tax treatment over stocks and other investments. What's more, Canada doesn't allow for mortgage interest deduction yet its homeownership rate is comparable to the U.S.
At least the tax credits are expiring. I say, good riddance.
If the government would have gone door to door to ask people for cash to chip in on the housing give away, most would have told it where to go. For some crazy reason, Americans have decided the government should do whatever it wants as long as the money is borrowed. A real head scratcher. Good article, say hi to Blythe.