Last December, I wrote a little tongue-in-cheek piece that was supposed to have an absurdly large number in it, $100,000. Directly redistributive policies are not necessarily bad, but it's important to be aware of the likely consequences if we're to evaluate whether they make good policy.
The actual legislation that got passed for the most recent round of housing subsidies created a refundable tax credit of 10% of the purchase price, up to $8,000, for people who have not owned a home in three years and who will stay in the newly purchased home as their primary residence for at least three years. This '$8,000 first-time home buyer tax credit' has made its way past the academics and wonks into our political discussion; most everybody knows about it.
What interests me is that most of the debate behind it, the exploration of what exactly the consequences, intended and unintended, have been, is largely absent in the political discourse. It's easy to support reality when it's the GOP doing something silly. What is harder is when our own partisanship conflicts with objective analysis, and the housing tax credit is a great case study for analyzing this tension.
One of the themes I come back to a lot is that while we have some bottlenecks in our system, lack of information is not one of them. We have enormous amounts of a variety of kinds of evidence. Thanks in no small part to information technology advances, it is easier than ever for us as average citizens to be able to find this information, too. There are countless blogs that talk about economics and finance day after day after day. It's not that any one perspective is always right, all the time, but that democracy, the law of large numbers, the competition of ideas, or however you like to describe it, has a way of filtering out the less helpful perspectives and highlighting the better ones, Adam Smith's invisible hand, if you will, at work in the market for information.
So what are the first order consequences of the housing tax credit?
It seems beyond doubt that more houses were bought and sold than otherwise would have occurred in the second and third quarters of this year, in fact, probably hundreds of thousands of more houses bought and sold. This means the government will owe tax refunds when the new homeowner files either the amended 2008 return or their 2009 return. It means real estate agents and mortgage brokers earned payments they would not otherwise have received. It means sellers of houses did not have to reduce prices to a lower, market-clearing, equilibrium point.
Is that good?
To evaluate whether that's a valuable policy, we can approach from several different angles. We could see if a lot of Democrats supported it or a lot of Republicans opposed it, and if so, declare it good. We could find out what industry lobbyists, like the National Association of Realtors and theNational Association of Home Builders, think of the program. We could see if the program helped anyone, without considering how the program would be paid for. We could do a cost-benefit analysis, comparing the expenses of the program to the gains enjoyed.
Choosing one's method of evaluation is critically important, because the choice of underlying values by definition impacts the conclusion of whether something is a good idea or not.
If we take the last approach, an evidence-based approach, an attempt to objectively analyze the pros and cons, we run into some pretty hard numbers. It turns out, in fact, my $100,000 figure wasn't nearly absurd enough. Calculated Risk did one of those fun 5th-grade-math back-of-the-envelope calculations, and as they described it
But if we actually look at the numbers, this is a poor choice for a second stimulus package. 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.
That $43,000 didn't disappear. This isn't like dropping a bomb on Baghdad where the productive wealth that went into it is literally blown up. While there is a little bit of waste in administering a program, that is rather small in a program like this. The main question here is one of distribution.
The listing real estate agent, the buyer's real estate agent, the mortgage broker, the bank or owner of the mortage-backed security related to the seller, the bank or other financier of the buyer, the seller, and the buyer split that money up amongst themselves, with the particular allotments determined by the relative negotiating skills of the individual participants in each individual transaction.
Since those dollars came not from private actors but from taxpayers, the question that confronts us is what is the societal value of having more transactions in the housing market? Remember, we're not talking about building more affordable housing or creating additional households; the tax credit was not targeted at either of those outcomes. What we are talking about is increasing the number of transactions. At the margins, people who were renting a house moved down the street into a different house, swapping a lease for a mortgage. Here, I'm not just talking big picture. My household literally moved from a beautiful three bedroom apartment I've lived in since college about a mile down the road to a great two bedroom condo. We could do that because we had been saving for a house anyway; the $8,000 was certainly insufficient on its own. No poor person who can barely make rent in a one bedroom apartment in a not-so-nice neighborhood could remotely afford either our old apartment or our current condo.
Or as Dean Baker explained
(Full disclosure: I benefited from this tax credit -- thank you very much, suckers!)
So what's the takeaway?
If you come to the conclusion that this is valuable, then the best policy would be something much larger. You see, the main problem with the $8,000 cap is that it really only helps people who have some savings already (or, who are going the FHA-approved, little to no money down route, which is a comically funny development where we're addressing a problem of financial risk by creating more risk). If some is good here, then more is better. We should expand the credit. Forget the push for 10% or $15,000. Let's do something more like %50 or $50,000. If we're going to do something, let's be bold. Heck, let's go for my original notion, $100,000.
However, if you look at the data and think that's a lot of social money to devote to private gain, then it suggests we should craft our policies differently. Rather than using taxpayer money for handouts and bailouts, we should use it for safety nets and investment.
The takeaway, in other words, is that there are a lot of programs like the housing tax credit, and many of them are of a scale much, much larger than the approximately $15 billion cost. If we like this concept, we should scale the housing giveaway up to match the other giveaways. If we don't like this concept, then we should agitate to get rid of all the giveaways, from subsidizing risky mortgages to regressive tax breaks to homeowners to bailing out failed companies to Fed and FDIC guarantees on the alphabet soup of unnecessary financial products. That, after all, would leave us a lot of cash to use on productive federal outlays like social insurance and investment in the public commons.
Or to personalize it, if we as a society value me making my own household, rather than living with a roommate, then by all means, expand the housing tax credit. I guarantee you there is an amount that would have me go out on my own next year. But I won't share the exact figure; I don't want to give away my entire beneficial asymmetric informational position.