FacebookTwitterGoogle+RedditEmail

Son of the Housing Bubble

by DEAN BAKER

It’s often said that the difference between the powerful and the powerless is that the powerful get to walk away from their mistakes while the powerless suffer the consequences. The first-time homebuyers’ tax credit provides an excellent example of the privilege of the powerful.

The first-time homebuyers tax credit was added to President Obama’s original 2009 stimulus package. It was introduced by Senator Johnny Isakson, a Republican from Georgia, but the proposal quickly gained support from both parties. The bill gave a tax credit equal to 10 percent of a home’s purchase price, up to $8,000, to first time buyers or people who had not owned a home for more than three years. To qualify for the credit, buyers had to close on their purchase by the end of November, 2009, however the credit was extended to buyers who signed a contract by the end of April, 2010.

The ostensible intention of the bill was to stabilize the housing market. At least initially it had this effect. There was a spike in home purchases that showed up clearly in the data by June of 2009. House prices, which had been falling at a rate of close to 2.0 percent a month stabilized and actually began to rise by the late summer of 2009, as buyers tried to close on a house before the deadline for the initial credit. There was a further rise in prices around the end of the extended credit in the spring of 2010.

However once the credit ended, prices resumed their fall. By the end of 2011 they were 8.4 percent below the tax credit induced peak in the spring of 2010. Adjusting for inflation, the decline was more than 12.0 percent.

The problem was that the credit did not lead more people to buy homes, it just caused people who would have bought homes in the second half of 2010 or 2011 to buy their homes earlier. This meant that the price decline that was in process in 2007-2009 was just delayed for a bit more than a year by the tax credit.

This delay allowed homeowners to sell their homes for higher prices than would otherwise have been the case. It also allowed lenders to get back more money on loans that might have otherwise ended with short sales or even defaults. The losers were the people who paid too much for homes, persuaded to get into the market by the tax credit.

This was the same story as the in the original bubble, but then the pushers were the subprime peddlers. In this case the pusher was Congress with its first-time buyer credit.

According to my calculations, the temporary reversal of the price decline transferred between $200 and $350 billion (in 2009 dollars) from buyers to sellers and lenders. Another $15-25 billion went from homebuyers to builders selling new homes for higher prices than would otherwise have been possible.

While this might look like bad policy on its face, it gets worse. The tax credit had the biggest impact on the bottom end of the market, both because this is where first-time buyers are most likely to be buying homes and also an $8,000 credit will have much more impact in the market for $100,000 homes than the market for $500,000 homes.

The price of houses in the bottom third of the market rose substantially in response to the credit, only to plunge later. To take some of the most extreme cases, in Chicago prices of bottom tier homes fell by close to 30 percent from June 2010 to December of 2011, leading to a lose of $50,000 for a buyer at the cutoff of the bottom tier of the market. The drop in Minneapolis was more than 20 percent or more than $30,000. First-time buyers in Atlanta got the biggest hit. House prices for homes in the bottom tier have fallen by close to 50 percent since June of 2010. That is a loss of $70,000 for a house at the cutoff of the bottom tier.

Many of the 11 million underwater homeowners in the country can blame the incentives created by the first-time homebuyers credit for their plight. This was really bad policy, which should have been apparent at the time. Unfortunately, it is only the victims who are suffering, not the promulgators of the policy. Welcome to Washington.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This article originally appeared on Huffington Post.

 

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

More articles by:
July 27, 2016
Richard Moser
The Party’s Over
M. G. Piety
Smoke and Mirrors in Philadelphia
Jeffrey St. Clair
The Humiliation Games: Notes on the Democratic Convention
Arun Gupta
Bernie Sanders’ Political Revolution Splinters Apart
John Eskow
The Loneliness of the American Leftist
Guillermo R. Gil
A Metaphoric Short Circuit: On Michelle Obama’s Speech at the DNC
Norman Pollack
Sanders, Our Tony Blair: A Defamation of Socialism
Claire Rater, Carol Spiegel and Jim Goodman
Consumers Can Stop the Overuse of Antibiotics on Factory Farms
Guy D. Nave
Make America Great Again?
Sam Husseini
Why Sarah Silverman is a Comedienne
Dave Lindorff
No Crooked Sociopaths in the White House
Dan Bacher
The Hired Gun: Jerry Brown Snags Bruce Babbitt as New Point Man For Delta Tunnels
Peter Lee
Trumputin! And the DNC Leak(s)
David Macaray
Interns Are Exploited and Discriminated Against
Brett Warnke
Storm Clouds Over Philly
Ann Garrison
Rwanda, the Clinton Dynasty, and the Case of Dr. Léopold Munyakazi
Chris Zinda
Snakes of Deseret
July 26, 2016
Andrew Levine
Pillory Hillary Now
Kshama Sawant
A Call to Action: Walk Out from the Democratic National Convention!
Russell Mokhiber
The Rabble Rise Together Against Bernie, Barney, Elizabeth and Hillary
Jeffrey St. Clair
Don’t Cry For Me, DNC: Notes From the Democratic Convention
Angie Beeman
Why Doesn’t Middle America Trust Hillary? She Thinks She’s Better Than Us and We Know It
Paul Street
An Update on the Hate…
Fran Shor
Beyond Trump vs Clinton
Ellen Brown
Japan’s “Helicopter Money” Play: Road to Hyperinflation or Cure for Debt Deflation?
Richard W. Behan
The Banana Republic of America: Democracy Be Damned
Binoy Kampmark
Undermining Bernie Sanders: the DNC Campaign, WikiLeaks and Russia
Arun Gupta
Trickledown Revenge: the Racial Politics of Donald Trump
Sen. Bernard Sanders
What This Election is About: Speech to DNC Convention
David Swanson
DNC Now Less Popular Than Atheism
Linn Washington Jr.
‘Clintonville’ Reflects True Horror of Poverty in US
Deepak Tripathi
Britain in the Doldrums After the Brexit Vote
Louisa Willcox
Grizzly Threats: Arbitrary Lines on Political Maps
Robert J. Gould
Proactive Philanthropy: Don’t Wait, Reach Out!
Victor Grossman
Horror and Sorrow in Germany
Nyla Ali Khan
Regionalism, Ethnicity, and Trifurcation: All in the Name of National Integration
Andrew Feinberg
The Good TPP
400 US Academics
Letter to US Government Officials Concerning Recent Events in Turkey
July 25, 2016
Sharmini Peries - Michael Hudson
As the Election Turns: Trump the Anti-Neocon, Hillary the New Darling of the Neocons
Ted Rall
Hillary’s Strategy: Snub Liberal Democrats, Move Right to Nab Anti-Trump Republicans
William K. Black
Doubling Down on Wall Street: Hillary and Tim Kaine
Russell Mokhiber
Bernie Delegates Take on Bernie Sanders
Quincy Saul
Resurgent Mexico
Andy Thayer
Letter to a Bernie Activist
Patrick Cockburn
Erdogan is Strengthened by the Failed Coup, But Turkey is the Loser
FacebookTwitterGoogle+RedditEmail