The Possible Impact (and Real Cost) of Extending the First-Time Homebuyer Tax Credit
Today we announced the results of a recent survey, which Zillow conducted with Harris Interactive, asking prospective first time homebuyers how an extension of the $8,000 tax credit would influence their decision to buy a home next year. If the credit were extended, of those who intend to buy a home, 18 percent called the credit the “primary influence” in their decision, 25 percent said it would be a “significant influence,” and 27 percent said the credit would have “some” influence on any home buying decision. Thirty-one percent said it would have no influence at all on their decision to purchase.
According to our further analysis, this suggests that the extended tax credit could, at minimum, stimulate an additional 334,000 home sales compared to what we would otherwise expect to see during the period between December 2009 and November 2010. That could spell the difference between a 5% annual increase in homes sales over the period assuming an extension of the tax credit, versus a 2% annual decline in homes sales without the tax credit. With no extension, there’s a good likelihood that home sales this January will dip below their January 2009 level (257,000 home sales in the month). This seems likely given that January 2010 home sales would be hit both by the loss of incremental home sales that would have been stimulated by the tax credit, as well as by the loss of sales that were pushed up to September or October 2009 (i.e., people who would have normally bought in January buying in September instead in order to avail themselves of the tax credit).
Of course, to get those 334,000 incremental home sales next year, we’ll have to give the tax credit to an estimated 1.86 million first-time home buyers, creating a net cost to the government of $14.86 billion for the extension. This gives one some sense of the magnitude of the leakage of the tax benefit to those that would have taken the desired action (buying a home) even without a government incentive. For every five homeowners who get the tax credit, four of them would have bought the home anyway. In essence, this means that the government will have to pay roughly $44,000 per home in order to obtain 334,000 more home sales than would have occurred without the tax credit.
Creating demand seems like a worthwhile endeavor, even if it’s temporary or simply shifts future demand closer to the present. Marginal demand is likely needed much more in the short-term to get the engine running again than it is long-term when the engine will be running on its own accord (i.e., the eventual bottom in home prices and decreasing unemployment will be large demand boosts). The trouble is, it’s quite possible the upside pressure created by this marginal demand is likely to be completely overwhelmed by the downside pressure created by the massive numbers of foreclosures we’ll see as the foreclosure rates increase on their way to a peak next year.
What’s your perspective on the pros and cons of extending the tax credit?
Note: The full methodology of the survey and the analysis is available here.
Dr. Stan Humphries is a real estate economist and real estate expert for Zillow. Stan is in charge of the data and analytics team at Zillow, which develops housing market data for most major metropolitan statistical areas in the U.S., and provides economic research for current real estate market conditions. He helped create the algorithms for the popular Zestimate® home value and the Zillow Home Value Index (ZHVI).
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