The Senate Banking Committee held a hearing today to discuss whether or not Congress should extend and broaden an $8,000 first-time homebuyer tax credit that was included in the economic stimulus package. If Congress doesn’t act, the credit will expire on Nov. 30.
The credit’s leading champion has been Sen. Johnny Isakson (R-GA), a real-estate industry favorite who was actually called before the committee to testify. Isakson told the committee that extending the credit is “our way out” of the current recession, and warned that if the credit is not extended, the U.S. economy will tumble into a “dramatic and awful situtation”:
If we don’t do the housing tax credit, in my personal opinion, and extend it through midyear next year and take away the first-time homebuyer means test and raise the income qualification, we will have a dramatic and awful situation in the United States of America from which recovery is going to be even more difficult than we’ve experienced already…I think it’s our way out.
As I’ve pointed out before, the credit is targeted poorly, and is a very expensive and inefficient way to stabilize housing prices. And Isakson’s proposals to open the credit to all buyers (instead of only first-time buyers) and remove the credit’s income cap will turn it into a government subsidy to rich homebuyers who would have bought their homes anyway.
The National Association of Home Builders, which favors extending and broadening the credit, calculated that such a move will only cause about 383,000 additional sales through 2010. At the expected $40 billion total price tag for the program, this breaks down to $104,400 per additional home sold. And to be fair, the hearing was a bipartisan love-fest for the credit, with both parties lavishing praise onto it.
If Congress is actually worried about a “dramatic and awful situation,” it might want to take a look at some of the latest foreclosure data. After all, in terms of foreclosures, the last three months were the “worst three months of all time”:
During that time, 937,840 homes received a foreclosure letter…That means one in every 136 U.S. homes were in foreclosure, which is a 5% increase from the second quarter and a 23% jump over the third quarter of 2008…Most disturbing is that all foreclosures — not just repossessions — are rampant despite efforts to corral them. Not only has the Obama administration’s Making Home Affordable foreclosure prevention program taken a bite out of REOs but lenders themselves have scaled back repossessions over the past few months to give the program time to work.
At the end of the day, there’s little chance that the credit will promote additional home sales, and it may even artificially prop up housing prices, prolonging the economic crisis by delaying the housing market from hitting bottom. The credit undeniably makes for great politics, but in terms of policy, the money would be far better spent on foreclosure prevention efforts or neighborhood stabilization.