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Were the 2008-2009 tax credits successful?

By Mike Carlier

Industry Observer

March 18, 2012 01:37 AM

In his recent post, Bill Austin summarized the federal tax credits for home buyers in 2008 and 2009 and the repayment requirements that came along with some of them. Some folks will be repaying the credits, and many will not.

Bill's post got me to thinking about just who was helped and who was not helped by the credits. My original thoughts during the credit periods have changed little. The credits had some good effects in relation to the overall economy, and they didn't do much for the people who actually got the checks.

The idea that consumer spending needed a shot of energy was probably valid during the recession that coincided the home buyer tax credits. The fact that one needed to be reasonably solvent to buy a home self-selected home buyers as excellent candidates for recycling the tax credit proceeds, especially when one considers that many had new homes and not enough personal property to fill them to capacity. Money handed to people who need to buy stuff and are not seriously in debt got recycled as expected.

The demand for homes spiked as a result of the popularity of the credits, and that is easily a verifiable fact. The prices of homes sold were inflated to meet the demand, probably by nearly as much as the value of the credits themselves. Who benefited from the inflated prices? Sellers of course were the benefactors. Individuals got more for the homes they sold, and they paid more for the move up homes that replaced them. That was probably a net wash. Lenders stuck with repossessed inventory certainly gained some benefit.

Who lost as a result of the tax credits? I think that the buyers were the big losers. They essentially made a deal with the government to pay an inflated price for a home and then get a rebate of up to $8,000 of the money they financed into their new purchase. It effectively accomplished the same thing in almost the same way that sent some individuals to jail. As Bill reminds us, some buyers will have to pay back the money they were given. They will actually have to pay it back twice, once to the government, and once to their mortgage holder.

The tax credits helped stimulate consumer spending, and they helped sellers. End of story.

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Dick Greenberg

New Paradigm Partners LLC - Fort Collins, CO

Northern Colorado Residential Real Estate

Hi Mike - Our data, and it just reflects our local markets, don't show any evidence of inflated prices. The impact on sales, though, is obvious across the board - the tax credits did stimulate a spike in sales, and the drop off after the eligibility period was very visible. The question for us is whether those sales would have occurred anyhow, but spread over a somewhat longer period - we're not sure there was much of a real net increase in sales.

Mar 18, 2012 02:23 AM

Chris Ann Cleland

Long and Foster Real Estate - Gainesville, VA

Associate Broker, Bristow, VA

You gotta love how the first of the credits was only for buying a bank owned home. There's the government trying to help their favorite sellers along.

Mar 18, 2012 03:35 AM

Mike Carlier

Lakeville, MN

More opinions than you want to hear about.

Dick, thank you for your comment. Is it possible that a spike in the number of sales (increased demand) had no effect on the selling prices of homes during that period? Looking at price data for Fort Collins, I see that there was a significant drop in prices between the time when the first credit was passed in July 2008 through the beginning of 2009. Then there was an increase that made up a significant amount of the drop. The uptrend ended in tandem with the expiration of the credits, and then there was a sharp decline in prices.

Looking at the data, could we deduct that there was some price support brought on by the credits? Perhaps there was more or less price support than the amount of the credits, and that's probably going to have to remain in the opinion category. It's hard to believe that the price support, through a combination of temporary increases and prevented decreases, was not significant. I'm guessing, and it is only a guess, that the $7,500 and $8,000 amounts are close to reality.

I think that many of the sales would have occurred anyway, maybe some a bit later in time. The buyers would have been in a much better bargaining position had there not been a spike in buying competition.

Mar 18, 2012 03:47 AM

Chris Ann, I think they later realized that first time buyers almost all bought bank owned property anyway. I doubt whether the goal of the credits was to do anything to help the housing industry. It was about how to put money in the hands of people who could afford to and would spend it on something other than debt reduction. It was the most effective stimulus since the preferential treatment given mortgage interest (especially HELOC interest) when all other consumer debt interest was eliminated from deductible.

Mar 18, 2012 03:53 AM

William Feela

WHISPERING PINES REALTY - North Branch, MN

Realtor, Whispering Pines Realty 651-674-5999 No.

I don't think so, I think they hurt. I met with 6 people who got the credits that lost that house. 2 of them had no intention of making any payments. They just wanted the credit!

Mar 18, 2012 01:42 PM

Bill, do you think they may have gotten a surprise when they had to pay the money back? With a three year residency requirement as a condition of the credit, there could be some surprises, either immediately or if/when the IRS catches up with them.

Mar 19, 2012 01:21 AM

Hi Mike - Sorry it took me a while to get back to your reply. We use our own MLS-generated data, and while it shows a similar trend to what Zillow reports, we wouldn't interpret the effects as being related to the credits in the same way. The price drops were the result of a lack of buyers, brought on by the housing crash as well as the overall economic situation. But they are, in fact, more reflective of a lack of higher priced homes - ones that would see little benefit from any credit program - selling in that market. Credit programs were in evidence in the lower price ranges, where for about 18-24 months, all the action was focused - and while we saw movement in the prices of reported sales, that didn't correspond to any significant drop in actual values. We saw average and median price drops mostly because lower priced homes were accounting for a much greater percentage of sales activity. We're seeing increases in those same numbers now as more activity returns to higher price ranges. And again, this is all a read on what happened locally, so all I'm suspecting is that the credits didn't have a substantive effect on home values in northern Colorado.

Mar 19, 2012 09:35 AM

Ron Marshall

Marshall Enterprises - Saint Michael, MN

Birdhouse Builder Extraordinaire

Geez, I wouldn't trust Zillow, Dick. But, this is an eye-opening discussion. And, it is probably different in different areas of the country similar to how the housing market is rebounding without any government programs in place other than the usual FHA, MFHA, etc.

Mar 23, 2012 03:25 AM

Patricia Kennedy

RLAH@properties - Washington, DC

Home in the Capital

Hey, Mike! I included this post in Last Week's Favorites. Have a great week.

Mar 25, 2012 06:57 AM

Hi Patricia. Thank you for the recognition!

Mar 26, 2012 12:43 AM

Sharon Alters

Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL

Realtor - Homes for Sale Fleming Island FL

Mike, I don't know about inflated prices - but those buyers definitely paid higher interest rates. Rates settled down again right after the credits went away and haven't gone back to those heights again.

Sharon

Mar 27, 2012 04:01 AM

Were the 2008-2009 tax credits successful?

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