Latest Homebuyer Tax Credit: Pay More, Get Less
Continue Reading Add comment November 4th, 2009
pPresident Obama could sign the $10.8 billion homebuyer tax credit extension and expansion plan into law as soon as next week. The Senate this evening voted 98-0 in favor of the extension. The House is expected to approve it within days./p
pBut a new report from Goldman Sachs suggests that the six-month extension might do little for the fragile housing market and could be even less effective than the soon-to-expire credit for first-time buyers that cost taxpayers about $8.5 billion and lasted nearly a year./p
pThe Congressional proposal would give buyers until April 30, 2010 to sign purchase contracts and another 60 days to close. And it will no longer be just for first-time buyers. Homeowners who have lived in their current home for five of the last eight years can claim $6,500, under the new law, which would only apply to houses purchased after the current tax credit expires Nov. 30. Income limits will be more generous: $125,000 a year for individuals, $225,000 a year for married couples.br /
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But Goldman Sachs economist Alec Phillips says, in a report released to clients Nov. 3, that the expanded program won’t raise home prices and sales much and likely won’t significantly trim the supply of unsold homes./p
p”The extension of the current credit will probably result in some incremental first-time buying but not as much as the last one,” Phillips said in a phone interview today. “The expansion to the other population of buyers [existing homeowners] will provide a small boost to prices, but no more than 1%.”/p
pAccording to Phillips’ calculations, all but about 200,000 of the 1.4 million first-time buyers who claimed the credit this year would have purchased a home even without the incentive. And the credit resulted in boosting home prices only by about 1%(Phillips assumed in his calculation that home prices rose in part because sellers built a large portion of the credit into their asking prices). /p
pThe pool of first-time buyers who still need an incentive to get off the fence is likely small because many of them have already taken advantage of the now-expiring credit. Existing homeowners who qualify for the new $6,500 credit could spur additional sales. But the supply of unsold homes will remain unchanged because most homeowners will have to sell their existing home in order to buy a new one (The credit only applies to principal residences). /p
pThis doesn’t mean that the credit is useless, only that it is inefficient. For one thing, it could stimulate the economy by giving consumers more money to spend. (Economist a href=”http://bit.ly/2Olc3U”Simon Johnson argued/a in the Washington Post last week that the tax credit is both inefficent as a homebuyer incentive and as a economic stimulus)./p
p”We were not arguing that [the expanded credit] would have no effect,” Phillips said. “Just will the effect be as great as last one?”br /
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