Are tax credits for first-time buyers too costly?

After a number of fumbles and failures, it seems that government has finally found a way increase home sales. The trick? A little tax incentive bribery.

First we have the National Association of Realtors which says that we’re now selling existing homes at the rate of about 5.10 million per year.

Next we have the IRS which says so far this year that 1.4 million people have claimed the $8,000 tax credit now available for first-time homebuyers.

These numbers are important because you have to wonder how many homes would be selling without the first-time credit. NAR says that the credit has created some 350,000 additional sales, but not everyone is so sure.

“Like Cash for Clunkers, the housing credit does not magically generate demand,” argues a Washington Post editorial. “It moves demand around — from the future to the present, and from other consumers, and other sectors, to homebuyers and homes. These ‘results’ don’t come for free. Cash for Clunkers added $4 billion to the federal deficit, and the housing tax credit is on track to add $15 billion.”

The worries of the Washington Post are curious. It’s entirely true that most individuals who got the first-time tax credit would have bought anyway. Such folks did not create extra sales or additional reductions in the massive inventory of unsold homes.

But if the NAR estimates are generally right, it’s also true that an additional 350,000 homes were removed from the marketplace, reducing the supply of unsold homes and thus helping to slow or halt the fall in property prices. Given tough market conditions, 350,000 extra home sales is a big deal.

But the Post is not so impressed.

“Congress,” says the paper, “should end this program while it still can. With hundreds of billions of dollars in support from the Fed, the Treasury and the FHA still in place, the housing market can survive without it. Indeed, the looming problem for the U.S. economy is how to wean housing off its dependence on federal backing. That job will be hard enough without adding yet another not-so-temporary subsidy to the list.”

Spending Taxpayer Dollars

You have to wonder how the Post figures the government provided “hundreds of billions of dollars” in support of the housing industry — or how the money might be better used.

For example:

The government in not subsidizing the FHA program — for decades the program has been entirely funded by insurance premium payments from borrowers. In fact, the FHA is a big donor to federal coffers. Between fiscal 2000 and 2001 the FHA sent checks worth $13.5 billion back to the U.S. Treasury — that’s premium money from borrowers and almost as much as the Post estimates as the cost of the first-time buyer credit.

The federal government gave out nearly $200 billion to more than 600 banks. That’s not money which has gone to the housing market, it’s generally gone to prop up banks with toxic assets that would otherwise fail.

The huge insurance company, AIG, received $182 billion from the government. Some of this money, perhaps much of this money, went to pay off various banks that held credit default swaps from AIG.

Citibank received $306 billion in federal guarantees as well as $45 billion in cash.

The government gave $45 billion to the Bank of America and “agreed to share potential losses on a $118 billion pool of financial instruments owned by Bank of America, consisting of securities backed by residential and commercial real estate loans, and corporate debt and derivative transactions that reference such securities, loans and associated hedges."

In contrast, the first-time buyer program is going to cost as much as $15 billion. In normal times there might well be grounds to object, but in the context of today's economy $15 billion is small change — it’s actually less than the $27 billion loss at just one company, Merrill Lynch.

The Multiplier Effect

Those 350,000 additional sales computed by NAR do not tell the whole story.

You also have to look at the “multiplier effect” for the money spent on the first-time buyer credit. For example, Smith would not have purchased unless he could get that $8,000 tax credit. He is one of our 350,000 extra buyers.

Smith bought from seller Wilson. Wilson might not have had a sale if Smith could not get the credit — there would simply be more inventory and fewer sales and no doubt lower home values.

Now we have those 350,000 additional buyers (like Smith) and then a 350,000 additional sellers (like Wilson). That’s 700,000 “sides” as they like to say in real estate. These additional transactions directly create income for brokers, lawyers, movers, lenders, tax collectors, furniture sellers and a host of other folks. All of a sudden that original $8,000 tax credit has set in motion a lot of buying and selling, the first link in a chain of financial activity which is good for the economy.

"What new federal housing program has materially helped more people in more towns and cities than the first-time homebuyer credit?” asks James J. Saccacio, chief executive officer at, the nation’s largest source of foreclosure listings and information. “Each additional purchase helps a seller who in turn does something with the proceeds from the sale. The credit is a financial catalyst, something which sets in motion a large volume of economic activity at the very time when we need as much consumer spending as possible.”

Added Saccacio: “For decades the policy of the federal government under every administration has been to encourage homeownership and the widespread availability of credit to qualified buyers. The tax credit for first-time homebuyers follows in this tradition, and it does so in a way which does not require complicated programming or vast bureaucracies.”

But what about all the money given to banks? Hasn't it set off a multiplier effect as well? Yes and no. While the first-time homebuyer credit is based on performance — you actually have to buy a house — there’s no requirement for a specific action by bailed-out banks.

Government money has been used to simply increase reserves, pay executive bonuses, buy other banks and cover losses — an increase in lending activity is not required.

Lastly, while $15 billion is a lot of money in a general sense, it’s just a third of the money given to the Bank of America, a third of the cash given to Citibank and less than 10 percent of the money received by AIG.

How Temporary?

In 1943, in the midst of the Second World War, temporary rent control rules were established in New York City, rules which STILL apply to more than 1 million apartment units. The situation in New York is unusual but it does raise a concern: When should the tax credit for first-time buyers end? We need a benchmark, some reasonable measure at which point the credit should be discontinued, so let’s agree that the credit for first-time homebuyers will automatically terminate as soon as all bailout money is re-paid and all bank guarantees come to an end.

Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site,