House tax credit will cost $16 billion this year

September 1, 2009

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.

(ht CR)

7 comments

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http://www.reuters.com/article/rbssFinan cialServicesAndRealEstateNews/idUSN01473 61420090901

“The chatter from (some) hedge funds is that there is a bank default”, said Jon Najarian, a founder of Web information site optionmonster.com.

Posted by larry boucher | Report as abusive

interesting. Net that of federal taxes and the impact of lower unimpoyment benefits for some number of realtors who might have ended up on the gov’t dole and…

oh, still a big expense for the gov’t.

Posted by Andrew | Report as abusive

Unlike the cash for clunkers the scope of this credit is going to mean it has a much larger and longer term impact. In fact as discussed – http://www.savingtoinvest.com/2009/02/15 000-first-home-buyer-tax-credit-in.html – there is a reasonable chance the credit will be extended.

Actually, the longer term impact may be that more homeowners underwater as they buy homes too expensive for themselves that will eventually decrease in value. We need to get back to basics, saving money the old fashion way, saving for future college costs (as you will not be able to ATM your home for this most likely) and affording a house within your means. They are not within means today. They will be because our future generation is making less, have a ton of debt and are less educated.

Posted by Lori | Report as abusive

A number of people are wondering if the $8000 new home buyer credit (detailed below) expiring on December 1st will be extended. This is particularly the case if they are considering a purchase in the next few months because they must go through the whole home buying process and close before the end date.

‘On a national basis, according to economists at the National Association of Realtors, anywhere from 300,000 to 350,000 additional sales of houses will be stimulated this year by the credit. Each home sale generates about $63,000 in downstream “ripple effects” elsewhere in the economy, they say. That includes sales of furnishings, appliances, lawn mowers, landscaping and renovation materials, plus moving expenses. If you accept the numbers – and some analysts consider them a stretch – this means the housing credit provides a powerful, immediate stimulus bang for the buck. Failure to extend what may be one of the most effective pieces of the Obama administration’s 2009 stimulus legislation would cost jobs, economic growth and tax revenues, the housing groups argue.’

Read More: http://www.housingnewslive.com

Posted by DAVE | Report as abusive

This stimulus, same as the one for clunkers, doesn’t really help.

For clunkers, it just stimulated the dealers to raise prices. I read in another article that during the “cash for clunkers” dealers increase prices (sold closer to invoice) by near $3000.

For houses, prices are adjusting for the “free money” that the stimulus is bringing in. The final payment for the buyer would be about the same as without stimulus. Without stimulus, prices wouldn’t have corrected up this summer. The final result is same for buyer, and more debt for the tax payer.

Goverment, please do us a favor and stop “stimulating”.

Posted by Victor | Report as abusive

Who really believes that Realtors receive unemployment? They’re self-employed!. I’m no proponent of the tax credit, but come on.

Posted by Pat Mirabelli | Report as abusive

[...] the Cash for Clunkers program was expensive ? That program sounds like a bargain compared to the $16 billion the US will have to shell out for the housing tax [...]