Homebuyers’ tax credits help restore economic foundation

Flawed policy distracts from the underlying importance of housing stability.

Last week, millions more Americans became eligible for a home buyersâÄô tax credit. Until the middle of 2010, first- time buyers will continue to receive an $8,000 refundable tax credit for purchasing homes under $800,000. Under the new policy, the income ceiling for eligibility is nearly doubled; a two-adult family earning up to $225,000 will qualify for the full credit. Additionally, current homeowners meeting the same conditions will qualify for a credit of up to $6,500. It is unfortunate that this policy was adopted without location considerations, violating the economic foundation upon which housing intervention is based. While the credit will surely do much good for many individual families, this particular policy fails to maximize the public benefit of such a large investment. The estimated $11 billion cost is excessive, and spending could be better targeted and aligned with other policy goals to increase the return on investment. Merely incentivizing aggregate demand is an unnecessarily blunt instrument to achieve housing market stability. However, these policy design problems should not implicate the broader goal of supporting certain home buying. The case for some public involvement in the housing market is clear. Homeownership is strongly associated with improved economic status and areas with high rates of ownership are typically better-maintained and suffer less crime. The value of a home, most individualsâÄô largest investment, largely depends on the value of neighboring homes. As the rate of foreclosure in a neighborhood increases âÄî whether due to the broader economy, predatory lenders, or overzealous buyers âÄî property values invariably decrease, leaving many residents owing more than their property is worth. Starved of access to equity, more properties fall into foreclosure, further reducing neighborsâÄô land values through no misdeed or misjudgment of their own. Adding incentive to home buyers in such neighborhoods maintains value and preserves the investment of innocent bystanders. In addition, most homebuyers subsequently purchase many secondary goods and services, such as furniture and home improvement. This ripple effect generates more jobs in related industries throughout the community, from retail to manufacturing and construction. It is clear that Congress could have enacted a better-targeted, more cost-effective arrangement for granting these generous tax credits by limiting the credit to home purchases in neighborhoods hard hit by foreclosure or in areas with historic price resiliency that have been disparately buffeted by external factors. Additionally, given the expanse of farmland and open space consumed by development during the housing boom, tax credits should not be given for purchase of new construction in previously unoccupied areas. The ultimate policy that emerged from the legislative process is deeply flawed and spends much-needed dollars on those who do not need government support. However, these particular concerns should not cloud the greater case for better-targeted government intervention to support troubled neighborhoods and prevent further metropolitan sprawl. Kyle Weimann welcomes comments at [email protected]