In a POST I did last September I explained how the increase in sales directly attributed to the First Time Buyer Tax Credit showed the cost of the program to be as much as $43,000 per additional sale. New information reported by CalculatedRisk.com shows that a tepid response to the program’s extension may leave us with a cost that is more than double that of the original credit, and could equal as much as $100,000 per additional home sold.
Not only does the cost far exceed any benefit from such an artificial stimulation, but the increase in sales appears to be only “stealing” those sales from the future. I reported the same result for the original tax credit in a POST I did last November. Regarding the current credit, Mark Vitner, a senior economist at Wells Fargo Securities, stated, “We clearly pushed demand forward. . . .” Additionally, according to government reports, the original tax credit experienced as much as $500 million in fraud, including fraudulent requests from as many as 53 IRS agents.
Whether we’re talking of stimulating the auto industry with Cash for Clunkers, increasing jobs as in Cash for Caulkers, or boosting the housing industry with the Tax Credit, such programs appear to be ill conceived, fraught with problems, and ultimately cost far more than originally intended. Those of us in the housing industry as well as our political leaders must acknowledge that the recovery will be slow, and that attempts to speed it up only result in wasted money and the potential for future bubbles.
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I'm in the camp that believes that most of the buyers who will benefit from the tax credit would have bought anyway.
I agree, and wonder how the market will react when the Fed ends its purchases of mortgage-backed securities.
We will be paying for all these programs until the end and then passing them on to our children and grandchildren. Enough with the government bail outs...I agree - for the most part the first time home buyers would have purchased anyway.
Lenn--it depends on what particular demographic you're looking at. Alot of young professionals in their late 20's and early 30's are highly motivated by the tax credit. In CA, I have not come across one buyer who did not mention the tax credit and how it was a plus for getting to them to even purchase a home.
John--love the article! Alot of less economically savvy people just think short sightedly about the tax credit and not of the future implications of all of us as taxpayers, especially the younger generation that has to retire later because of all of these superficial economic bandaids and actually pay the price for them. At least in my area of the country, comparing home prices/sales pre tax credit, it is causing a paralysis of inflated of housing prices because people are so quick to buy at overly high prices just so they can qualify for the tax credit. This does not allow the market to adjust itself, and all of the Fed's meddling is interfering with the Invisible Hand and preventing the real estate cycle to continue on its usual route.
Unprecedented times call for unprecedented measures. Imagine what might have happened to the real estate market, the auto industry, the economy, and even the world economy if governments all over the world did not step in to help. Governments are the only ones with the financial resources and the authority to step in and help. Whether or not you agree with the type of help provided, and I know you don't, John, no one can predict the future. All we can do is learn from the past. The whole world borrows from the future to pay the present -- people, businesses -- so why not governments to get us through some rough times?
The first-time home buyer tax credit hsa been mentioned by everyone I've met during the last year. The $6,500 tax credit not so much, but then the great majority of the people I work with are first-time buyers.
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I tend to agree with your analysis. I'm not even sure hindsight will be 20/20 in this particular case. I'll be interested to see (if possible) the true ROI and impact.
Terry - While the intentions may have been good, the results have been disastrous.
Hazel - Thus far, the interfering has not produced the desired results and has cost more than expected.
Jim - The times are definitely unprecedented, but I question the actions. We've created a debt load that is becoming unmanageable.
Chris - We'll soon be able to calculate the end result.
John,
The best solution is for the government to listen to the wishes of the people, but then we would be asking politicians to look beyond their own pockets.
Linda - We need more leaders and fewer politicians.
I'm a big fan of CR.
#10 - So am I; they have lots of great info and sources.
The market works, IF left alone. We have proven that time and again in our country. But for some reason, there are those that think they are smarter than the last person and THEY will make it better. The market always wins. You want more buyers next month, the market delivers, but that means the following month you will have less than you would have had had you left it alone. The net effect is ZERO and the taxpayer foots an unecessary bill. Free and Open markets (not just Real Estate) have had a huge hand in making the wealth this country has. Why some want to stifle that, I don't understand.
Thank you
Scott - You said, The net effect is ZERO and the taxpayer foots an unecessary bill. And in the case of all these stimulus programs, the bill is billions!
If the government really has that much money to waste I have a great idea. Pay all of the late mortgages current, and set up an inexpensive repayment to the government. I know it's a dumb idea, but it would probably be more effective than the current plan.
I'm with Lenn, #1. All the sales we've made, have been people in the pipeline. Nobody is calling saying, Get me a house so I can get the credit!
As a "first time agent" specialist I can say that 80% of my sales from last year were to first time buyers. Now I tend to agree that these people would have bought eventually anyway. Your post is pretty accurate I think we front loaded the system. They jumped in a bit earlier because we were dangling a carrot infront of them.
This is just more fuel for my fire: Tax credits don't solve problems, they at best delay them. The plug leaks when we need to fix the boat!
I think a lot of the first time buyers who buy might have bought anyway, but it was definitely part of their decision and thought process.
More evidence the government can do anything right. I don't think I want them to take care of my health care either.
Jon - A program pulled out of a hat might be better than the current plan.
Erica - And the guys in DC can't figure it out.
David - It would be different if we were creating a long-term benefit, but that doesn't appear the case.
Aaron - And the boat is sinking.
Christine - But the question is how many bought that would not have done so. The number appears not to justify giving out all that money to those who would have bought anyway.
Joseph - They do seem to know how to waste spend money : )
I agree with you... And for Jim, Comment #5, please feel free to Google "1920 Depression" and see what happened when the government DIDN'T increase spending in response to a slow-down...
Jim in #5 said:
Imagine what might have happened to the real estate market, the auto industry, the economy, and even the world economy if governments all over the world did not step in to help. Governments are the only ones with the financial resources and the authority to step in and help.
Let's imagine that. It would have meant that unviable businesses would have gone bankrupt and their assets would have been bought up by companies and people who could make them work. If GM went bankrupt, the factories wouldn't just disappear. They would be taken over by companies with better management. The management who ran them into the ground would have to find other jobs. Is that so bad? Incompetent businesses should fail.
In real estate, prices would have dropped to a point where more people could afford them at their current incomes without any crazy financing schemes. Many people would have been foreclosed on, the banks who made those loans would have big losses, as they should, and housing would be on a come back from a more reasonable price point. The people who were foreclosed on would probably be renting at much lower prices than their current mortgage payments. This would allow them the abilty to start saving again and maybe buy another home but at a much lower price.
Every resource the government gives out has to be taken from the hands of a private individual who then doesn't have that resource to work with. Government doesn't have some magical source of wealth that they can dish out whenever they want. They can just funnel resources to some favored groups at the expense of the taxpayer, both current and future. When they can't tax anymore, they print the money and create inflation which is the same thing as a tax but it is a much more regressive tax. If governments had their own supply of resources that they were able to create out of thin air, our problems would be over.
John: It's hard to say what might have happened if there hadn't been a credit. In our market buyer's have been very motivated by the credit and low rates. I would expect that for every dollar spent on housing, loans, etc, there is a ripple effect, just like that initiated by employee paychecks in the community. It's not all bad.
I think the credit is just extending the problem. Very insightful post1
Wow had not heard this side of it before and am sitting in front of my computer wondering if I had been better off being ignorant to this situation - Ignorance can be bliss!
Both cash for clunkers AND the tax credit were bad ideas.
I saw this earlier and just cringed. Meanwhile NAR lobbies to extend the credit. Go figure.
John,
It's interesting that on many occasions the cost of administration for a government sponsored program outweighs the benefits.
Brian
John: Good post. In my neck of the woods it doesn't seem to be doing much good and I hear that now it will not be extended. Maybe the fact that there is a true ending to it, those buyers that wait until December 24th to shop might get going! Sorry I can't be more optimistic on this subject.
Lane - It just seems that the government keeps coming up with unworkable solutions.
Tim - Government doesn't have some magical source of wealth that they can dish out whenever they want. They can just funnel resources to some favored groups at the expense of the taxpayer, both current and future. That sums it up.
Matt - I think it is bad--a poor use of our dwindling resources. In the end the ultimate cost of the credit will be astronomical on a per unit basis.
Judy - Yes, it's putting of a day of reckoning with which we must come to terms.
Barbara - Ignorance may be bliss, but it doesn't make the problems disappear : )
Pam - As I mentioned above, they are a poor and misguided use of our resources. We CAN do better.
Cindy - The NAR and our politicians are only taking a very short-term view. What we need are long-term solutions that, while creating initial pain, will ultimately solve the problems.
Brian - Unfortunately, that seems more the rule than exception.
Lyn - The general consensus is that the credit has done little to stimulate housing.
John,
With cost "over runs" in Cash for Clunkers, Caulkers, and HB Tax Credit, I can't imagine where Health Care costs will go... but I have a good idea. Our government in broke(n).
KOOL AID, KOOL AID, Step right up folks we've got free ice cold KOOL AID for everyone!
The boat is indeed sinking.
Mary - At least our leaders are good at something; they spend money faster than they can take it in : )
Jenna - And I doubt the "Captain" or any of the "crew" are willing to go down with this ship.
John,
The cost is high, no question, but if there were no stimulus programs at all, the housing market might have totally collapsed, dragging the banks down with it, and that cost could have been even higher. It's a tough call.
Esko - It's my belief that the money could have been spend in much more effective ways, I doubt that taking away the number of additional sales directly attributed to the tax credit would have collapsed the market.
Hi, John. Even the smallest retailer knows that if you paid more for the goods then you sold them for, you end up...bleeding RED INK!
Leslie - It's a pretty simple concept.
This right here is just another example why the presidents new plan to give home owners $1500 to move out is crazy, you thought fraud was easy before? This will make it even easier!
Todd - With the government giving away hundreds of billions, there will be more fraud than we can imagine!