November 12, 2009

Revisiting the homebuyer tax credit

Mark recently wrote about the misguided economics of renewing and expanding the federal homebuyer tax credit. Although the legislation (signed into law last week) gained the support of many economic conservatives in Congress, it "struck me as a bad idea," Mark wrote.

In its latest iteration, the credit applies to current homeowners in addition to first-time buyers, and Congress has raised the income limit for eligible buyers from $150,000 to $225,000.

Writing for the New York Times' Economix blog, Harvard economist Edward L. Glaeser explains why the expanded credit is likely to have limited economic impact.

I'm not a fan of the original home buyers' tax credit, which offered up to $8,000 to buyers who currently don't own a home, but at least that policy could be justified as a tool for increasing homeownership and selling our current stock of vacant homes. I'm not sure either of those goals is worth subsidizing, but I can't think of any significant benefit that comes from giving current homeowners a buyer's benefit.
Certainly, extending the tax credit to current owners doesn't increase homeownership.... There is also no reason to think that a tax credit that encourages house-trading among current owners will help the overall housing market.

A subsidy for existing homeowners provides an equal incentive for buying and selling. There will be no net decrease in the vacant housing inventory; basic economics suggests that any policy that provides equal incentives to buy and sell will do little to increase housing prices.

The good news, Prof. Glaeser writes, is that the homebuyer tax credit has an expiration date: May 2010. But, then again, that may not mean much.

Unfortunately, the events of the last week [the extension/expansion of the credit] lead me to suspect that the tax credit will continue to exist, like a B-movie zombie, long after it should have settled in its grave.

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