Commentary

Pricing In the Housing Tax Credit

From 2008 to 2010 we railed against the ineffectiveness and distortionary nature of the First-time Homebuyers Tax Credit. Each time the credit was extended we pointed to the uptick in sales to the point of expiration followed by a downward plunge of housing activity afterwards. Basic economic theory suggested that home sellers would anticipate the $6,500 to $8,000 more each buyer had in considering a house and would price that in. And it was also clear at the time that whatever temporary gains in housing demand were created, they were more than lost after the program as it just shifted demand forward and temporarily juiced prices.

A recently revised study from earlier this year, by Jonathan Brogaard (University of Washington) and Kevin Roshak (Kellogg School of Management), confirms this analysis. The authors write:

In times of economic crisis, governments often implement fiscal and monetary policies with the intent of limiting price and activity declines. Programs such as the Car Allowance Rebate System of 2010, (otherwise known as “Cash for Clunkers”), the tax rebate of 2007, and tax credits for first-time homebuyers of 2008 – 2010 were recently passed by Congress in an attempt to drive economic activity. An unresolved question in the economics and finance literature is whether short term government programs like these can spur economic activity that otherwise would not have occurred.

Using city level data their authors conclude:

Our baseline tests show prices rising by $6,116 because of the the American Recovery and Reinvestment Act of 2009 and the Worker, Home- ownership and Business Assistance Act of 2009. However, within two months of the tax credit expiration, prices fell by $6,600. Conversely, there is no evidence of an increase in the quantity of homes sold in the treatment markets, and nor is there evidence that the credit helped potential sellers prevent foreclosure. If the credits had any impact on quantity or foreclosures, it was very small relative to the size of the market.

See the whole study here.