Could First Time Homebuyer Tax Credit Return?

By Michael Kraus on August 30, 2010 The last iteration of the repeat homebuyer tax credit and the first time home buyer tax credits expired on April 30, 2010.  After their expiration, demand for housing utterly collapsed despite record low mortgage rates.  Currently there is a huge overhang of homes on the market (over 12.5 months worth).  The excess supply and lack of demand are causing house values to drop.  Nobody knows where the market will settle, but many are predicting declines of 5-20 percent over the next year or two.

One would think that this clearly demonstrates that the tax credits did nothing more than accelerate sales from the summer and fall into the spring, providing a temporary lift to the housing market, which resumed its decline as soon as the tax credit was withdrawn.  In short, we dumped billions in taxpayer money into the housing market for no real price stabilization.

Surprisingly, the Obama Administration has not ruled out bringing back the tax credits. According to a New York Times article, on Sunday HUD Secretary Shaun Donovan was quoted as saying:

“It’s too early to say whether the tax credit will be revived”.  Donovan said in an interview on CNN’s “State of the Union” program.  He said the administration would “do everything we can” to stabilize the shaky U.S. housing market”.

Another tax credit may stabilize the market temporarily by goosing demand for homes, as it did before.  Our current experience suggests that the lift would be temporary, at which point housing prices would resume their decline to whatever level is naturally dictated by the market (unless other conditions, such as the labor market, were to improve in the meantime).

It seems clear to me that the tax credits were bad public policy, and likely cost taxpayers billions of dollars that caused no long term benefit.  Despite this, I wouldn’t be surprised to see this country’s politicians enact another tax credit in order to curry favor with voters in November.  If there are any further developments in this story, I will be sure to update this space.