In early 2008, the U.S. housing market showed indications of extreme distress. Home sales were contracting, home prices were dropping; the number of building permits and housing starts had plummeted since 2005 and 2006, respectively.
Housing is a significant portion of the U.S. economy. The country had just entered the Great Recession, officially at the end of 2007. Many lawmakers hoped that the federal and state governments could do something to revive the housing market.
Over the following two years the federal government tried various home buyer and owner tax credit programs, designed to boost housing demand and new home construction while reducing inventories. Some 3.3 million homeowners made claims, costing the federal government $22 billion, according to an estimate by the Government Accountability Office in 2010. This report is quoted in a Brookings Institution paper discussed below.
It’s fair to ask, how successful were these tax relief programs in stimulating the housing market?
In a recently published paper, “An Evaluation of Federal and State Homebuyer Tax Incentives,” authors Karen Dynan, Ted Gayer, who are Senior Fellows at Brookings Institution, and Senior Research Assistant, Natasha Plotkin, concluded: “The various homebuyer tax credit programs had, at best, small and mostly temporary effects on housing activity.”
It’s hard to infer effectiveness with certainty because of all the factors impacting the economy and what would have happened had there been no stimulus. Nonetheless, the Brookings paper states that “the homebuyer tax credits probably did provide a general stimulus to the economy.”
Homeowner Tax Credits: 2008-2010
The first program tried was a homebuyer tax credit provision in the Housing and Economic Recovery Act (HERA) in 2008, signed into law by President George W. Bush. It was not very generous. First-time homebuyers received a tax credit of up to $7,500 toward the purchase of a home. The eligible purchase period was between April 2008 and Dec. 2008 at first. Strictly speaking, the HERA credit was available to July 1, 2009, but it’s assumed participants opted for a much more generous plan discussed next.
On top, the beneficiary was required to pay back the credit, and so, the HERA tax credit provision amounted to only an interest-free loan. As such, it was the least effective of the three programs, according to Dynan and Gayer.
As the housing market fell further, lawmakers expanded the homeowner tax credit incorporated in the American Recovery and Reinvestment Act of 2009 (ARRA), a.k.a. the “Stimulus,” which President Barack Obama signed into law Feb. 19, 2009. For first-time homeowners, it was much the same as HERA, except the new tax credit did not require repayment. Also, the maximum value allowed was increased to $8,000. Homebuyers had from Jan. 1 to Nov. 30, 2009 to take advantage of its availability.
The third piece of legislation to renew and expand the eligibility for the homeowner tax credit was in the Work, Homeownership and Business Assistance Act (WHBAA), 2009-2010, signed into law by President Obama Nov. 6, 2009. Again, repayment was not required, as long as the homeowner lived in the home for 36 months. The maximum amount available for new homeowners, $8,000, was the same as in ARRA. The WHBAA program also permitted higher income homebuyers compared to ARRA.
WHBAA expanded eligibility for the tax credit to repeat homeowners in case of the purchase of a new principal residence. The maximum amount for repeat homeowners was $6,500.
Findings and Recommendations
The authors used a multitude of quantitative tools and historical data to evaluate the effects of each of the programs.
Using graphical analysis, they concluded that HERA did not stop the decline of the various indicators of housing activity. “However, almost immediately after ARRA was passed, these indicators stabilized or increased. Between January and November 2009, the period during which the ARRA credit was only available to first-time homebuyers, seasonally-adjusted monthly sales rose 32 percent. Home prices were about flat, compared with a decline of 14 percent over the previous 11 months, and housing starts increased 39 percent,” state the authors.
However, the increased home sales activity due to the homebuyer tax credits would have occurred later anyway, according to Dynan and Gayer. “There can be benefits to accelerating economic activity if the economic slump is large,” they state.
Another conclusion: The WHBAA’s addition of tax credit for repeat homebuyers added little to none to the housing demand. Following the program, “any gains from the program partially reversed.” For this reason, Dynan and Gayer write that homebuyer tax credit is effective for the first-time homebuyers, but policymakers probably shouldn’t expand the program to persons who own a home.
Their research is completely separate from answering whether other federal programs, such as the Home Affordable Refinance Program (HARP), designed to help underwater homeowners refinance their mortgages, were effective. The authors in this analysis used averages and overall impact; they don’t assess whether the programs helped certain homebuyers, differentiated by income, age, or ethnic group.
The authors also examined the states which instituted complementary homebuyer assistance programs. Nineteen states provided bridge loans, enabling homebuyers to use the money for down payments and home purchase costs. Four other states developed programs that provided credits or grants to homebuyers.
These state programs at first glance appear helpful. Sales increased during the time the programs were in place and prices increased modestly compared to states without homebuyer programs. However, the authors state, “The programs appeared to have no permanent effect on sales, nor immediate effects on home construction.”
The state programs “had a greater impact on the housing market than the federal programs did, possibly because states were better able to design programs tailored to their specific conditions in their own housing markets,” write Dynan and Gayer.
Ron Dory contributed to this report