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Wednesday, July 7, 2010

An Economic Analysis of the Homebuyer Tax Credit

Mark P. Keightley
Analyst in Public Finance

There have been three different versions of the homebuyer tax credit enacted since the summer of 2008. In July 2008, Congress enacted a first-time homebuyer tax credit as part of the Housing and Economic Recovery Act of 2008 (HERA; P.L. 110-289). The tax credit was originally set to expire on July 1, 2009. The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111- 5) increased the tax credit's value and extended its expiration date to December 1, 2009. The Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA; P.L. 111-92) extended the tax credit through the first half of 2010 and expanded it to repeat homebuyers.

The changes enacted by P.L. 111-92 extended the tax credit to homebuyers who enter a written binding contract before May 1, 2010, and completed their purchase before July 1, 2010. These deadlines were extended by one year for members of the military and other individuals who serve on qualified official extended duty outside the United States for 90 days before May 1, 2010. The tax credit for repeat buyers was capped at $6,500 and was limited to those who have owned and lived in their current home for five of the last eight years. Other changes included an expansion of the maximum credit income eligibility limits to $125,000 for individuals and $225,000 for married couples, up from $75,000 and $150,000, respectively. Lastly, an $800,000 limit on the purchase price of a home was included.

Mostly recently, the deadline by which homebuyers need to complete their home purchases in order to qualify for the credit was extended to September 30, 2010. Buyers are still be required to have been entered into a binding contract before May 1, 2010. The extension was provided by H.R. 5623, the Homebuyer Assistance and Improvement Act of 2010. Due to several unrelated provisions contained in the bill the estimated $140 million 10-year cost of the extension was mostly off-set.

This report provides an economic analysis of the homebuyer tax credit. Recent data suggest that home prices in general may be stabilizing and that the home inventory is beginning to return to a more normal level. Given the close proximity of these improvements to when the homebuyer tax credit was enacted by HERA and first modified by ARRA, one could argue that the tax credit was the cause of these improvements. A correlation, however, does not imply causation. Around the same time, home prices were falling and mortgage rates were approaching recent historic lows, which may have led more homebuyers to enter the market.

Results presented in this report suggest that lower home prices and low mortgage rates were quantitatively more important in stabilizing the housing market than the tax credit. For example, the effect of home prices and mortgage rates on the typical buyer's mortgage payment is estimated to have been about eight times that of the first two versions of the tax credit. In addition, lower home prices and mortgage rates tended to benefit first-time and repeat buyers, as opposed to the tax credit which until recently just benefited the former.

Estimates of the number of additional home purchases that can be attributed to the ARRA and WHBAA versions of tax credit are presented and compared to those reported by private industry analysts. The estimates raise questions about those reported by industry analysts, as well as questions about how effective the tax credit may have been at reducing the home inventory. The analysis also investigates the tax credit's ability to support the housing market moving forward.

Date of Report: July 1, 2010
Number of Pages: 28
Order Number: R40955
Price: $29.95

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