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Why the Homebuyer Credit Didn’t Work

Do you remember that wonderful federal income tax credit of up to $8,000 that was supposed to jump start the nation’s housing market?

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Skeptics (like me) thought the homebuyer credit was doomed to failure, and we were right – big-time!

Two and a half years later, sales in most residential markets are still anemic and prices are still falling.

The real estate gurus at Case-Shiller expect more bad news: prices could fall another 15%-25%.

Sadly enough, the pessimists at Case-Shiller have proven to be among the few experts that you should believe anymore. The latest home sales numbers from February give them additional credence. Sales are still falling and so are prices.

So what went wrong with the vaunted homebuyer credit? Why didn’t it create the ongoing momentum for home sales our Washington politicians claimed it would.

The answer is simple. When all was said and done, the credit accelerated purchases by people who were already going to buy homes anyway. Once those folks collected their handouts, and the credit expired, there were no buyers in line behind them to keep things rolling. In other words, the government’s cash-for-condos scheme turned out just like the equally ill-conceived cash-for-clunkers program.

The moral of this story: taking money from the general taxpaying public and dishing it to people who happen to be homebuyers was no way to stimulate the real estate market. In fact, handing out cash to subsidize any particular economic sector won’t work in the long run. Once the subsidies run out, the law of supply and demand kicks back in with a vengeance. So the next time you hear about cash for (fill in the blank), bombard your elected representatives with emails in opposition. If they get a few billion messages, they just might pay attention.

Readers, did you or anyone you know use the tax credit? Did it convince you to make the purchase or were already planning to buy a home?

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About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.

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