House tax credit will cost $16 billion this year
You thought Cash for Clunkers was expensive? At $3 billion it’s a bargain compared to the amount of tax dollars used to inflate home sales. According to today’s pending home sales report, the National Association of Realtors estimates that 1.8 million to 2.0 million first-time buyers will take advantage of the $8,000 first-time home buyer tax credit.
At the high end, that’s $16 billion.
How many of those sales wouldn’t have happened if not for the tax credit? NAR estimates 350,000. Assuming four-fifths of those homes were sold by realtors at a 5% fee, and that the average home price is $150,000, then the tax credit has put $2.6 billion in the pockets of brokers.
In a phone conversation, NAR spokesman Walter Molony justified his organization’s support for the tax credit saying that it reduces inventory and thus stabilizes pricing, benefiting the economy. He argues that this is a net positive because house prices “overshot to the downside.”
But did they? Molony bases his opinion on NAR’s housing affordability index, which shows houses are cheap. But “affordability,” as defined by NAR, benefits from ultra-low interest rates. Without the Fed’s help, interest rates would be much higher and house prices much lower.
The answer for the housing market is to let prices fall so that buyers can afford to buy without the help of artificially low rates and misguided tax credits.
What Cash 4 Clunkers did for cars, the first time home buyer credit is doing for housing — pulling future demand into the present. Count on home sales to head back down after this tax credit disappears.