Jonathan Chait

The Wasteful Homebuyer Tax Credit

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Last fall, Ted Gayer estimated that some 85% of the homes purchased through the home buyer took credit would have been purchased anyway. Howard Gleckman points out that the critics have been vindicated:

For two years, the homebuyer credit has been in the running for Washington’s worst tax policy idea. Now, new evidence about this bit of legislative bilge suggests it may be time to retire the trophy.

The Commerce Department reports the new homes market collapsed in May after booming in March and April (chart). Why? Well, in early spring, in response to an intense marketing campaign by the real estate and mortgage industries, tens of thousands of buyers accelerated home purchases to take advantage of this sweet tax give-away (as much as $8,000 for some buyers) before the credit expired on April 30. Then, just as most sentient economists predicted, the market dried up. Actually, it didn’t just dry up. It became the Death Valley of housing.

New Home Sales chart

Monthly new home sales (which are seasonally adjusted) had been running about 350,000 in early 2010. As buzz about the credit heated up, purchases spiked to about 390,000 in March and to 450,000 in April. Then, the credit disappeared and so did the buyers. Sales in Mayplunged to 300,000, the lowest level in four decades.

As the chart shows, this was--entirely unsurprisingly--exactly the same pattern we saw when the credit was first scheduled to expire at the end of 2009: A big run up in sales in October and November followed by a sharp decline thereafter. 

Total amount of permanent job creation from this timing change: pretty close to zero. Cost to taxpayers: $12.6 billion just through last Februaryeven before the latest buying frenzy. What a deal!

Of course, in our tax-phobic political discourse, only subsidies delivered through direct spending can be "waste." Subsidies delivered through the tax code are just giving people their money back.

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