Tuesday, October 27, 2009

The $8,000 Question...

The Washington Post has a good analysis piece that considers the usefulness of the soon-to-expire $8,000 homebuyer federal tax credit.  Here's an interesting snippet from the article:

What happens when you artificially prop up housing prices? Imagine the credit were expanded to all home buyers and made permanent. This would simply boost housing prices at the low end of the market by close to $8,000, since all buyers would be willing to pay $8,000 more. (Prices would rise by a little less than $8,000 because at higher prices, more people would be willing to sell.) Whom does this benefit? Not first-time home buyers. It benefits people who already own houses (and their real estate agents) because it's a one-time boost in housing values.

This would be just the latest chapter in a long history of government policies to boost housing prices -- the mortgage interest tax deduction, the capital gains exclusion on houses, the extension of the mortgage interest tax deduction to second houses, etc. Each of these policies pushes up prices just once; if you want to keep pushing up housing prices, you have to keep adding sweeteners.

A temporary tax credit has a similar effect, but for a shorter period of time. It boosts the price of a transaction that would have happened anyway. It may create additional transactions, but is that a good thing? If someone could not have afforded a house without the tax credit, then what is he or she going to do when the tax credit goes away and the price of the house falls? In effect, the tax credit is a way of making houses temporarily affordable that would not otherwise be affordable, and we know where that leads (emphasis added because it really needs to be emphasized!).

The land use implications of this problem are immense.  Many jurisdictions are now stuck with bonds used to pay for the massive amount of infrastructure used to reach planned subdivisions and strip malls that will never be built (or at least won't be any time soon) since the supply of both is much, much higher than demand.  The result, in turn, is that the property and/or sales tax revenue that the jurisdiction anticipated from this investment won't be realized.

This is when the fiscal death spiral really starts as the lack of revenue hinders the ability to service the bonds issued to pay for the infrastructure that is now not really needed (by "infrastructure" I mean things like roads, sewers, water lines, police/fire stations, and the like).

This is just one more anecdote that seems to scream out for the need to re-evaluate the propriety of laws and policies that promote greenfield development.

Chad Emerson, Faulkner U.

http://lawprofessors.typepad.com/land_use/2009/10/the-8000-question.html

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Comments

Good article. It is exactly correct. As a former lender, I remember when VA mortgage loans required that the seller pay a 1% loan fee for the convenience of selling to a VA qualified buyer. The seller would simply agree to a higher price so that the buyer would effectively be paying the seller's fee. This is how some well-meaning government programs just mess up the works.

Posted by: Manawai | Oct 27, 2009 12:11:18 PM

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