Mortgage Applications Suggest No Uptick in Housing

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July 8, 2009 (Housing Market Monitor)

Mortgage Applications Suggest No Uptick in Housing

By Dean Baker

July 8, 2009

Homebuyer tax credits have little effect on the market.

The Mortgage Bankers Association Purchase Mortgage Application Index edged up slightly last week, but remained at a depressed level. The index stood at 285.6, up 6.7 percent from 267.7 the prior week. However, this is still an extremely low level for an index that was often over 500 at the peak of the bubble. The purchase index has hovered in the range of 250 to 290 for most of this year, with little discernible trend.

With the housing market seemingly stuck in the summer doldrums, it is perhaps a good time to consider two housing tax credits that are coming up for debate. The first one is an extension of the first-time homebuyer tax credit of $8,000 beyond its expiration date of November 30, 2009. The second proposal would nearly double the credit to $15,000, and have it apply to all homebuyers.

In evaluating both credits, it is important to ask what each credit is designed to accomplish, and who gets the money. By these criteria, neither credit looks very good.

The first-time homebuyer credit ostensibly expands the size of the market for ownership units by getting people who would otherwise be renters to buy homes. Of course, the vast majority of the people who will benefit from this credit would have bought anyhow, so the actual impact on the number of buyers is likely to be modest, almost certainly less than 200,000 in a market where more than 5 million homes still get sold in a year. Also, in many cases, the buyers are simply moving their home purchases forward from 2010 to 2009. So, the impact on the housing market is likely to be very limited.

The gainers will be largely upper middle-income homebuyers. The tax credit is refundable, so even people with relatively limited tax liability would be able to benefit from it (although it is also restricted not to be more than 10 percent of the purchase price, so people buying homes in depressed markets will not see the full benefit), but the home buying population has income substantially above the median. This is likely to be especially true in the current downturn. So, this tax credit is effectively giving $8,000 taxpayer dollars (close to 2 years of TANF payments) to families who are mostly above the median income level, because they bought a house. (I benefited from this handout.)

The $15,000 tax credit would cost considerably more for less obvious purposes. Nearly all the homebuyers who get this credit, who would not have been eligible for the first-time buyers credit, will also be home sellers. This will result in no net increase in demand for the market, although it should mean lots of business for realtors. (The sponsor of the tax credit, Senator Johnny Isakson, is a former realtor.) It could also lead to a large amount of gaming. If I sell my house to my brother and he sells his house to me, we could each pocket $15,000 at taxpayers’ expense. While advocates of the bill are convinced that such gaming will not occur, many people are convinced that widespread cheating takes place with the Earned Income Tax Credit, where only one-third as much money is at stake.

Even in the absence of cheating, the credit will disproportionately benefit higher-income families, especially since it is not planned to be refundable. Many moderate-income homebuyers will not owe enough taxes to fully benefit from this credit.

In short, neither tax credit is likely to do much to change the situation in the housing market. The main effect is to redistribute tax dollars to relatively better off households. In the case of the $15,000 credit for all homebuyers, the cost is estimated at being in the neighborhood of $35 billion a year, or a bit more than 1 percent of the federal budget and close to twice the annual TANF payment.

There seems little obvious purpose in trying to prevent the bubble from deflating and these tax credits are unlikely to accomplish that goal in any case. They just shift more income to the upper half of the population.


Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. CEPR's Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector.