Bad Call: Davis Supports Extending First-Time Home Buyer Tax Credit
Despite his continued cries that more money be spent on health care, Congressman Danny Davis announced yesterday that he will attempt to make less of that money available by supporting an extension of the first-time home buyer tax credit. The current credit has given up to $8,000 to qualified first-time buyers to purchase homes. “Qualified” buyers has included those who earn up to $150,000 a year individually or $300,000 a year jointly. Those who are too poor or whose credit is too weak to purchase a home get zero assistance under the program.
The problems with the credit are legion, but here’s a short summary of some of the major one’s that apparently didn’t faze Davis during his decision making.
Low- or no-down payment mortgages were one of the major contributing factors to the housing crisis, yet the tax credit allows this same practice to continue. Since the credit can be used toward down payments, it can be combined with products like the 3.5% down FHA loan to effectively purchase homes with zero money down, just like at the height of the risky lending frenzy. This means that the credit may just be fueling another real estate crash down the road – not mending the current crisis.
The credit does little if anything to solve the cause of the housing crisis. Home prices are falling because there is too much housing and too few people. By convincing people to stop renting and buy homes instead, the credit simply replaces an empty house for sale with an empty house for rent. As vacant rental units rise, rents will drop, as they already are, motivating fewer people to buy homes and therefore undermining the effect of the credit.
The program spends a lot of money to accomplish very little. According to the real estate lobbying group the National Association of Realtors (which supports the tax credit) the vast majority of those who take advantage of the credit would have purchased a home anyway. Taking these numbers into account, the estimated cost to create one extra home sale with the credit is $43,000. If the credit is extended, the price tag will rise to $258,000 per home.
The program helps many of those who need no help. As stated above, the tax credit can be claimed by individuals who earn up to $150,000 a year – hardly the kind of people who are suffering economic hardships. A cut of the money will also go to real estate agents and mortgage brokers, two of the very groups that helped create the crisis in the first place. The IRS is also currently examining 100,000 cases of possible fraud concerning the program, including $4 million in credits claimed by children under 18-years-old, another source of significant waste.
The credit encourages more people to go into debt. By definition, most first-time home buyers are renters who have no mortgage. By encouraging them to stop renting and take on home loans, the program is incentivizing debt. This could also have disastrous effects for the economy down the road if new buyers are unable to keep up with their loan payments.
The program may be bad for the environment. As Harvard economist Edward Glaeser recently wrote about the credit, “Federal tax policies toward housing have long encouraged Americans to emit more carbon. President Obama could do the country, and the planet, a service by either refusing to sign the extension of the $8,000 credit or by insisting that it be accompanied by offsetting reductions in the home mortgage interest deduction.” The The New York Times has also written on how housing subsidies contribute to carbon emissions.
All told, the first-time home buyer credit, like the “cash for clunkers” program Davis supported, does very little and helps those who need very little helping in the first place. What’s particularly bizarre is that Davis supports tax credits for programs like this, yet despite his stated concern about health care, he hasn’t bothered to cosponsor the Child Health Care Affordability Act, which would provide tax credits for children’s health care. Surely that would be a better use of limited resources than new houses and new vehicles.
If you’d like to help Congressman Davis see the light on this issue, contact his office and politely ask to have Davis reverse his position on this program. If Davis does correct his stance, we’ll be the first to give him credit here.
Update: Davis, disappointingly but predictably, has voted “yea” on the tax credit extension as part of H.R. 3548. By the estimate on his own website, the extension will cost $10.8 billion over ten years, an amount of money that could have given private health insurance to 430,000 people for the same period of time. Unbelievable.
