The Compromised Homeownership Tax Credit

Our guest blogger is Andrew Jakabovics, Associate Director for the Economic Mobility Program at the Center for American Progress Action Fund.

The compromise(d?) version of the stimulus bill wending its way through the Senate expands what had been a $7,500 tax credit for first-time homebuyers into what Dean Baker calls the “House Flipper Tax Credit.” The Senate Finance Committee neatly sums up this hugely expensive provision thus:

Homeownership Tax Credit: This proposal expands the current homeownership tax credit to $15,000 and allows the credit for all home purchases (not just first-time home purchases). The amendment reduces the period required to hold the property without recapture from 36 months to 24 months, eliminates the income phase-out, and eliminates refundability. The credit can be claimed over two tax years. This provision is effective date of enactment and expires one year after date of enactment. This proposal is estimated to cost $35 billion over ten years.

Here’s what’s wrong with the credit:

Shifting to unrestricted tax credit doesn’t reduce inventory: While I wasn’t wild about the first-time homebuyers’ tax credit (it largely paid people who were likely to buy a house anyway), it was at least narrowly targeted. Now, anyone who buys a home is suddenly eligble for a $15,000 windfall from the government. There’s another name for first-time homebuyers: renters. So the nice thing about incentivizing renters to make their first home purchase is that each buyer would reduce by one the number of properties available for sale.


We’re currently sitting with more than 4 million new and existing unsold homes available for sale, but shifting to an unrestricted tax credit does nothing to reduce that inventory. In order for most current homeowners to take advantage of the tax credit, they will need to sell their existing home, resulting in a net change of zero. So we’re basically throwing $15,000 per housing purchase at a solution that does nothing to help the housing crisis.

More useful to wealthier households: There is no longer a phase out for upper-income buyers. Moreover, it’s not actually $15,000 across the board. It’s 10 percent of the purchase price, up to $15,000. So if you happen to buy a home for more than $150,000, you get the full amount. A less expensive home? A smaller credit. In 94 of 168 metropolitan areas (as of the 3rd quarter last year), the median sales price of single-family homes was below $150,000, so the credit is more useful to wealthier households in most housing markets.

No longer refundable and skewed towards the rich: If you happen to have a tax burden less than $15,000, assuming you have just bought a house for $150,000 or more, you don’t get to claim the full amount of the credit (read: cash back that you could spend in a way that’s stimulative for the broader economy). The only people who can claim the full amount in one year are making over $100,000 (let’s keep in mind that these people have just bought a house and are claiming pretty substantial mortgage interest and property tax deductions before we even get to AGI). When you spread the refund over two years, you need to be making $75,000 to get close to claiming the full credit. This credit is unquestionably skewed in favor of wealthier households.

At $35 billion, it’s the second most expensive credit after the actually stimulative “making work pay” credit and more than twice as expensive as the equally brain-dead NOL carryback provision.