Friday, October 23, 2009

Cash for Condos

The first-time home buyer tax credit is due to expire next month. Anticipating the death of the credit, first-time buyers rushed to the market and helped to push up September home sales. Of course, commentators anticipate that home sales will collapse as soon as the credit expires (call it the cash-for-clunkers effect). From Bloomberg:
The $8,000 credit for first-time buyers, due to expire Nov. 30, has probably pulled sales and construction forward, signaling housing may cool in coming months. While Congress is considering extending the incentive, lower prices and mortgage rates have also contributed to steadying a market that endured the worst slump since the Great Depression.

“The rush to take advantage of the tax credit is obviously pushing up sales,” said Michael Gregory, a senior economist at Capital Markets in Toronto, who forecast sales would rise to a 5.5 million pace. “Although this is going to be temporary, it does absorb some excess supply and helps bring the market into balance going forward.”
 Is the credit really absorbing any excess supply? Or are consumers merely accelerating purchases they would have made anyway at a later date? The debate will rage on, but perhaps taxpayers should examine the costs of the program more carefully. For example, the Brookings Institute recently determined that:
[T]he credit costs the government about $43,000 for each additional home sale it produces. That is because most of the two million or so home buyers expected to claim the credit would have bought a house anyway. Only about 350,000 were additional buyers.
Further, the program appears to be plagued with fraud. Tens of thousands of ineligible claims are being paid to the tune of millions of deficit dollars. LA Times reports:
This year's $8,000 federal tax credit for first-time home buyers has attracted as many as 90,000 ineligible claimants -- including a 4-year-old child -- raising questions about efforts to extend the popular program.

In all, tax credit claims totaling more than $600 million are suspicious, tax officials testified Thursday before Congress.
And what about those efforts to extend the program? Beside the fact that the main proponents of the credit are home builders and Realtors (who critics feel are almost the exclusive beneficiaries of the credit), the IRS concedes that efforts to expand the program will still lead to fraud:
"Based on the administration of the credit today, I am very concerned about the IRS's ability to effectively administer the credits that are claimed before the Dec. 1 deadline, let alone any credits that may be claimed within future extended deadlines," Treasury Inspector General J. Russell George testified before the House Ways and Means Oversight subcommittee.
So, do the benefits of increased consumption today (and the corresponding increase in consumer sentiment) outweigh the $43,000 government bucks per sale and 90,000 or so potentially fraudulent claims that the IRS cannot detect? Anyway you cut it, any extension of this tax credit surely will not help conquer the waste and inefficiency in government spending.


  1. So what should we do? We paid for it, so we shoudln't have this issue any more, it's just not fair.

  2. The government should stop giving handouts, that's what. HTH.

  3. Nice post to take out the information about the issue.

    Arrielle P


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