Did the First Time Home Buyer Tax Credit Work?

Did the first time home buyer tax credit work?  This is the question that occurred to me today when I read this piece in the New York Times by Casey Mulligan, a University of Chicago economics professor.  While I am certainly not an economics professor, I find the logic behind this piece to be somewhat questionable, and I must respectfully suggest the conclusion is incorrect.  You should probably click through to read the whole thing, but here is an outtake:

“But the wider market is quite a bit wider: the stock of owner-occupied houses in the United States is worth about $14 trillion, with an additional $3 trillion of rental housing. From this perspective, the $19 billion in first-time home buyer tax credits amounts to about one-tenth of 1 percent.

For the same reason, the possible expiration of credit is not an important event for the housing market. The credit was not designed to last more than year or two, whereas houses last decades or even centuries. Most of the value of a house accrues in the decades after the first year or two of its existence.

Certainly some housing construction projects and housing purchase deals were accelerated to conclude before the credit expired. But accelerating a deal is far different than creating a deal out of thin air.  That’s why I expect little, if any, housing price reduction after the credit expires.”

Now, it is unlikely that we will really know the total effects of the first time home buyer tax credit for some time, but the initial evidence does not seem to agree with Mr. Mulligan’s analysis.  The most recent Case-Shiller House Price Index showed prices increasing – in May.  Now the tax credit expired at the end of April 30th, but people have until September 30th to close on the deal signed prior to the expiration.  As a result, some of the effects of the credit are seen after the expiration.

Two days ago, Calculated Risk posted an article that suggests that housing prices are falling now.  Now it is possible that the drop in prices is not attributable to diminishing demand, but rather that demand is staying constant and supply is increasing due to the large numbers of distressed properties and REO on the market.  However, mortgage purchase applications have pretty much collapsed since the expiration of the credit.  My thinking is that the drop in prices is probably attributable to both a fall in demand (because of the expired credit) and an increase in supply.

It is my belief that the tax credit accelerated sales from the summer and fall into the spring, and now we are seeing the after-effects of this acceleration.  We spent $19 billion (so far) and I’m not sure that it actually prompted many people to make purchases they would not have made eventually anyway, and now we are dealing with prices that are falling again.  I also believe that the tax credit artificially propped up the housing market, and simply dragged out the amount of time it will take for the market to bottom out and eventually recover.

With tremendous numbers of foreclosures, problems at Fannie Mae and Freddie Mac, a serious problem with oversupply of homes, and housing prices that appear to be falling, I am not sure what was accomplished with the first time home buyer tax credit other than to goose demand in the short term.  I am left to conclude that this was not good policy.

Possibly there are other beneficial effects that I am overlooking, but I am not sure what they are.  What are your thoughts on the effectiveness of the first time home buyer tax credit?  Am I wrong?  Let me know in the comments section below.