Home Buyer Tax Credit Econ 101
If American taxpayers get a bill for $43,000 for the sale of every home to a first-time buyer who would not have bought if he or she didn’t get an $8,000 credit, is the program, which is set to expire in 60 days, worth it?
This estimate comes from our preferred calculator of risk, Calculated Risk, but we contend that this is a miscalculation of risk. Follow CR’s original logic here:
The NAR recently reported:
NAR estimates that about 1.8 to 2.0 million first-time buyers will take advantage of the $8,000 tax credit this year, with approximately 350,000 additional sales that would not have taken place without the credit.
You can calculate the new $15 billion projection; 1.9 million times $8,000.
But this only resulted in 350,000 additional sales. Divide $15 billion by 350 thousand, and the program cost is about $43,000 per additional buyer. Very expensive.
Now the National Association of Home Builders estimates that expanding and extending the credit through 2010 would generate 500,000 additional sales at a cost of about $30 billion. So this is approximately $60,000 per additional house sold. And I think the cost will be much higher.
Since that original post, the $43,000 price tag per incremental home sold thanks to the $8,000 tax credit under the terms of the American Reinvestment and Recovery Act of 2009, has gotten wide play among economists who generally posit that Americans would spend their tax money in better ways.
Recently, using that same calculus, CR goes so far as to assert that the 350,000 incremental home buyers in 2009 is 1) wrecking the apartment rental market, and 2) very likely to exert a deflationary fieldforce on the Consumer Price Index if a home buyer tax credit gets an extension.
The rental vacancy rate was already at a record 10.6% in Q2 2009. Some quick math suggests the tax credit will push the national vacancy rate above 11% soon.
And that means even more pressure on rents (rents are already falling). This is good news for renters, but this will also lead to more apartment defaults, higher default rates for apartment CMBS, and more losses for small and regional banks.
And falling rents are already pushing down owners’ equivalent rent (OER), and my guess is OER will probably turn negative soon. Since OER is the largest component of CPI (and almost 40% of core CPI), this will push down CPI for some time.
CR can continue to build a fabulous series of scenarios from his original assumption, but we believe that original assumption is a miscalculation.
Paul Krugman writes below, not about the home buyer tax credit, but about calculating accurately, the cost of proposed cap and trade legislation. But his logic on that issue is what leads us to believe that Calculated Risk’s $43,000 figure is an erroneous benchmark of the program’s cost:
Beck got his number from someone who learned about a guesstimate of what the auction value of permits might be (way higher than current estimates, by the way), divided by the number of households, and proclaimed this the cost of the bill. In effect, he looked at a guess about the size of the blue rectangle, which does not represent an economic cost, and called that the cost to the economy.
In a way, though, what Martin Feldstein did was worse. He took the CBO’s estimate of “compliance costs”, which was $1600 per household in an early report (it’s now down to $900, but who’s counting?), and implied that this was the economic cost of the legislation. But “compliance costs” are basically the sum of the blue rectangle and the red triangle; the true economic costs are just the triangle, and are much smaller.
Another way to say this is that under the Feldstein method, any time you try to correct an externality, which necessarily means changing relative prices, all of the negative effects of the price change will be counted as a cost — but none of the positive effects will be counted as a benefit.
Bad stuff. And what you should bear in mind is that all I’m doing here is conventional neoclassical economics, quite literally basic textbook material. What does it say when the people who claim to believe in this stuff throw it out the window as soon as it leads to policy conclusions they don’t like?
I.e. It is possible to do the arithmetic correctly and get the math wrong. (It should be noted though, that Krugman has voiced opposition to tax credits for new home buyers as well, so this example is not to say that he supports our view about the potential extension of the program).
Everybody knows the immediate pressing issue is we need to get the public sector out of the grill of the private sector. That’s going to take jobs. First jobs have to stop going away, and then they–private sector ones–have to start coming back.
We need an extension of the home buyer tax credit to keep the economy headed toward where it will begin to expand jobs sooner than later. Let’s talk about the program from a realistic cost and benefit analysis.