Brookings Panel Evaluates Homebuyer Tax Credit Programs
July 9, 2013 01:12 PM
At a recent forum held by the Brookings Institution in Washington, DC, the results of an in-depth study of the federal homebuyer tax credit (HTC) and complementary state-level initiatives was released. Karen Dynan, Vice President and Co-Director of Brookings’ Economic Studies, and Ted Gayer, a Joseph A. Pechman Senior Fellow and Co-Director of Brookings’ Economic Studies, discussed their findings, published in The Recent Homebuyer Tax Credit: Evaluation and Lessons for the Future. (Natasha Plotkin, Senior Research Assistant at Brookings’ Economic Studies, was a co-author of the paper but not in attendance.) A panel discussion followed, moderated by William Gale, Senior Fellow and Arjay and Frances Miller Chair in Federal Economic Policy at Brookings. The panel consisted of Ed Brady, President of Brady Homes and a member of the Executive Committee of the National Association of Home Builders; Jonathan Hanks, Senior Vice President and COO of the Utah Housing Corporation; Jed Kolko, Chief Economist and Vice President of Analytics at Trulia; and Christopher Mayer, the Paul Milstein Professor of Real Estate and Finance and Economics at Columbia Business School.
After the bursting of the home price bubble in the mid-2000s sent the housing market into a depression, the federal government introduced a variety of new measures aimed at sustaining the flow of mortgage credit and boosting housing demand. Measures included a tax credit for home buyers, various foreclosure prevention and mitigation initiatives, refinancing programs, and the Federal Reserve’s efforts to reduce interest rates.
Dynan, Gayer, and Plotkin’s research looked at how these various federal programs were structured and, based on their features, what effects they would have on the economy. Evidence of how the programs affected housing market conditions was sought out, both while the programs were in progress and after they ended. The authors found through a variety of analysis that the initiatives likely provided a modest short-term boost to housing demand but some of the effects were reversed after the credits’ expiration.
Based on their research, the authors offered several conclusions for future policy makers who may consider using a homebuyer tax credit as a stabilization tool:
With a time-limited basis, HTCs will to some extent “pull forward” sales that would have occurred naturally. Such time-limited credits will therefore be followed by a period of partial “payback.” There can be benefits to accelerating economic activity if the costs of an economic slump increase disproportionately with its size.
Homebuyer tax credits should target first-time homebuyers. There may be no additional demand associated with purchases by households already in home ownership as they may likely be selling a home at the same time of purchase. Consideration should also be given to the implications for the rental market, as first-time buyers may be leaving a rental.
The benefits from any boost to economic activity associated with a tax credit must be weighed against alternative uses of the funds.
Programs that allow homebuyers to monetize their credits sooner should facilitate purchases by cash-constrained households and increase the impact of a credit.
State-level programs that were similar in structure to the federal program yielded clearer evidence of a modest impact on housing market conditions than the federal programs. This is possibly due to having better variation with which to test for effects but also could reflect a better ability by states to design programs that are tailored to specific conditions prevailing in their own housing markets.
“Economic effects were smaller or larger, based on how HTC programs were set up,” said Dynan. “HERA [Housing and Economic Recovery Act of 2008] had little effect, while ARRA [American Recovery and Reinvestment Act of 2009] was hard to isolate due to other policy and economic developments at the time.”
Gayer added that an “analysis of federal and state level programs conclude that the credits provided a modest boost to home sales and prices while they were available, while some changes were partially reversed after their expiration.”
“Mortgage-related policies had little effect,” said Mayer during the discussion. “The Home Affordable Modification Program (HAMP) result was nowhere near what the Obama administration projected. It did, however, save many from foreclosures that could have gone forward.” He pointed out that government support helped only the best borrowers, with the Home Affordable Refinance Program (HARP) was pursued exclusively by high-quality borrowers until mid-2012. Refinancing never reached the levels it was at prior to the market’s collapse. Conversely, credit card, automotive, and bank credit resurged quickly. “Housing has not, due to the large involvement by the government in loans and financing after the bubble popped,” said Mayer. “Future government action should focus on re-establishing reasonable lending standards and ground rules.”
Kolko presented four challenges facing current U.S. housing policy. The first is a need for more home ownership as a starting point, not a result. Secondly, “concerns about a ‘moral hazard’ are overblown in politics, establishing a deep divide that is difficult to cross.” A moral hazard is a situation where a party will have a tendency to take risks because the costs that could incur will not be felt by the party taking the risk. Moral hazard arises because an institution or individual does not take the full consequences and responsibilities of its actions, and therefore has a tendency to act less carefully than otherwise would, leaving the other party to hold some responsibility for those actions. Research showed that the projected moral hazard by politicians never materialized among the general lending public.
“The institutional mess by these policies, covering a multitude of possibilities and occurrences, makes the tax code seem simple in comparison,” said Kolko of the third challenge facing housing policies. The last challenge is that action must be taken more at the state and local levels and less so at the federal level.
Kolko indicated he wasn’t concerned about the current rise of mortgage interest rates, as “they still have a long way to go before harm.” He also isn’t concerned about the increased role of investors within the market; “the concern is counterfactual; where would the market be—currently on a slow rebound—without the influx of these cash investors?” he said. “They’ve been beneficial, not detrimental.”
He was, however, concerned about current mortgage credit, as lending is still tight and difficult to obtain for many. Younger people today take on more debt and cannot afford the required down payment or may not have the good credit necessary for a loan. “Affordability is also a concern,” said Kolko. “It should be easier to build where there is high demand within geographical locations, but instead it is much more difficult. This raises prices and often overinflates property values, making housing less affordable to an already-struggling class of homebuyers.”
Hanks discussed briefly the HTC programs established in Utah, specifically the Salt Lake City area. Previously depressed, the city rebounded more through the state’s programs rather than the federal’s. “Participants took advantage of the more streamlined program,” said Hanks. “A constant push on maintaining inventory—through development and construction—and stable pricing has been successful in keeping demand steady.”
Brady indicated that the housing slide within the construction industry began in 2005, with a 63 percent drop in new home construction between 2005 and 2008. The HTC benefited the industry as it stemmed a price decline. “Without the HTC, home construction would have continued to decline and increased the amount of homeowners in foreclosure or holding an underwater mortgage,” he said. The tax credits did boost job creation for a short time, but fell off after the programs expired. They did not stimulate or generate the business for home building that the industry was looking for. “Three versions of HTCs were complicated and took away their effectiveness for the market.”
He indicated that in the future, one complete package that provided declining credits over time would be better. “Direct monetization—rather than applying the credit to future income tax returns—could also help for the immediate buyer. Such a program could generate more economic stimulation with proper underwriting,” said Brady. “What we need is a stable housing finance system that is sustainable.”