If you want to take advantage of the first-time homebuyers tax credit, run. Today is the last day the government will pay you to buy a house.
Since 2008, some $12.6 billion in credits have been shelled out to homebuyers. This program was supposed to end last Fall, but was extended until today based on the notion that it was providing a key pillar of support to the humbled housing market.
Which, frankly, is mildly true at best. Don't shed a tear for the loss of this program, Fools. The finance blog Calculated Risk put it best when writing, "This [credit] is obviously bad economics, but it must be good politics."
Since day one, there's been fairly widespread agreement from financial and economic experts that the housing credit would do little good. I'm not one to blanketly swear off all stimulus on the grounds that Uncle Sam can only break things. There have been well-thought-out forms of stimulus over the past two years. The housing credit just wasn't one of them. Here are five reasons why.
1. It was grossly expensive
Around 1.8 million buyers received the housing credit. Yet you'd be wrong to assume that this means 1.8 million extra sales were stimulated. Many of these buyers would have bought homes anyways, with or without the credit.
The housing website Zillow.com ran a survey last fall and found that only 18% of buyers who might receive the credit called it their "primary influence" for buying a home. Nearly a third said it would have no influence at all.
Running these numbers against estimated home sales, Zillow calculated that the cost per sale that would not have occurred without the credit could be $44,444. Using updated home sales information, Calculated Risk concluded that the cost to taxpayers per additional sale might exceed $100,000. At any rate, we paid a lot of people a lot of money to do something they'd have been happy to do for free.
2. It was terribly inequitable
The credit was universal throughout the nation: Qualified buyers could receive up to $8,000. Problem is, $8,000 has different meanings in different markets. If you're buying an $80,000 rambler in Wahoo Nebraska, $8,000 is a big deal. If you're shopping for even a shoebox in Manhattan, $8,000 is practically meaningless. Plus, many regions that were wrecked by the housing collapse, and hence in need the most stimulus, were places like Los Angeles, San Francisco, and Miami that have high nominal prices to begin with. Where the stimulus was needed the most, it was largely irrelevant.
Also, when you provide an $8,000 credit, buyers will be willing to pay $8,000 more than they would without it. So come tomorrow, there will be legions of buyers willing to pay $8,000 less than they would today. That hurts sellers, not buyers.
3. For many borrowers, it was dangerous
Plenty of buyers were able to use the credit as a down payment. This is especially true for those who borrowed from the Federal Housing Administration (FHA), which is happy to extend credit with just a sliver of a down payment. Last May, FHA chief Shaun Donovan said, "We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans so that the cash can be used as a down payment."
Again: good politics, bad economics. What this does is creates homeowners who have none of their own skin in the game, have very little equity, and are buying homes at artificially inflated prices. If this sounds familiar, it's exactly what we had from 2003-2007. And that didn't end well.
4. In some ways, it perpetuated the problem
If the goal was to prop up home prices, then the housing credit almost certainly worked. But if the goal was to create a healthier housing market, it may have made the problem worse.
Home prices nationwide have stabilized in recent months, and are rising in many markets. This might seem like welcomed news, but it isn't if stimulus measures like the housing credit stabilized prices at an artificially high level.
That's because falling prices aren't the problem; they're the symptom of a bigger problem, which is excess housing inventory. Yet if we look at housing inventory numbers, it's hard to say that we've really cleaned out the boom-years excess:
Source: U.S. Census Bureau
Source: U.S. Census Bureau
As this shows, inventory levels have come back to earth since peaking last year. But current levels are historically average -- not below average, where you'd see excess supply being removed from the market. I'm not claiming to know exactly where the market's true equilibrium is, but that supply hasn't even dropped below its historic average suggests that prices should have fallen more than they have.
5. It didn't boost the economy in an efficient way
Stimulus can be awesome if what you're investing in has a specific long-term utility. Building highways is a good example. The stimulus puts people to work, and after the economy recovers, you've got a road to show for it that will enhance productivity.
Housing credits are a different animal, particularly if the homes purchased with the credits are preexisting units. Existing homes are simply shuffled around between owners. All that comes from this are transaction costs and a few extra bucks in the old owners' pockets -- both of which yield a low "multiplier" in economic parlance. It should come as little surprise, then, that some of the biggest supporters of this program were real estate agents. Megahomebuilders like Beazer Homes (NYSE: BZH ) and DR Horton (NYSE: DHI ) also got a boost from buyers who used the credit to contract new homes. But it's right to question whether stimulating the construction of new homes is the right thing to do during a time when the problem is that there are too may homes out there.
Better luck next time
There's little doubt that housing is healthier today than it was even a year ago. We've made giant strides toward normalcy. In the end though, I think history will look back on the housing credit program as an impediment, not driver, of this recovery.
Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.