The numbers are encouraging: Housing prices soared 12.2 percent this past May compared to last May. It was the biggest year-over-year increase since February 2006 and the 15th consecutive monthly increase in home prices nationally, according to the data analysis firm CoreLogic. That's good news for homeowners, and it's good news for states and localities, who stand to benefit from a consequent boost in property taxes.
Sales of existing homes were up as well -- 12.9 percent higher this May than a year ago, according to the National Association of Realtors. Overall construction spending increased 5.4 percent above last May and housing starts were up 28.6 percent.
All of these positive numbers have led to an important question for policymakers: Did federal and state programs help stabilize the industry during the crisis? There were tax credits to encourage homebuyers to go out and find a home to own; programs to help underwater homeowners sell their homes; and various programs to help foreclosed homeowners stay in their homes. Were they effective? Did they lead to the rebound?
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Economists Karen Dynan and Ted Gayer with the Brookings Institution attempt to answer those questions in a new paper, "The Recent Homebuyer Tax Credit: Evaluation and Lessons for the Future." In it, they look at a series of programs starting with the homebuyer tax credit of 2008. A year later that credit was modified and extended twice by Congress as part of the American Recovery and Reinvestment Act of 2009. At the same time, states were actively complementing the federal programs. Eighteen states provided incentives to homebuyers in the form of a short-term loan that in effect monetized the federal tax credit. The idea was to help cash-constrained households make a down payment or pay closing costs, and then repay the loan when they were reimbursed by the tax credit.
Here are a few of Dynan and Gayer's conclusions on the programs:
When offered on a time-limited basis, a homebuyer tax credit will to some extent "pull forward" sales that would have occurred anyways.
To induce a net increase in the demand for owner-occupied homes, a homebuyer tax credit should target first-time homebuyers. Benefits from any boost to economic activity associated with a homebuyer tax credit needs to be weighed against alternative uses of the funds.
Complementary programs that allow homebuyers to "monetize" their homebuyer tax credits sooner should facilitate home purchases by cash-constrained households and in turn increase the impact of a credit.
State-level programs that were somewhat similar in structure to the federal program yielded clearer evidence of a modest impact on housing market conditions than the federal programs. It may reflect a better ability by states to design programs that are tailored to the specific conditions prevailing in their own housing markets.
The paper was discussed at a June forum at the Brookings Institute, where a panel of economists and industry experts commented on what they saw as the pluses and minuses of the programs. Some of their key points follow.
The Importance of Simplicity
Christopher Mayer, a professor at the Columbia Business School: "The [homebuyer tax credits of 2008 and on were] simple and take up was very big, whereas HAMP [the Home Affordable Mortgage Program] was complicated and take up was limited."
Ed Brady, a homebuilder on the executive committee of the National Association of Home Builders (NAHB): "By 2008 our industry was already in a lot of pain when the feds introduced [the Housing and Economic Recovery Act (HERA), the homebuyer tax credit of 2008]. We were looking for help to take care of inventory overhang. HERA was not very effective, but the second generation of tax credits helped stem price decline, which was a huge problem. Did [the programs] make the new-home industry happy? No. Part of the problem was that there were three generations of [tax credits], and trying to educate people on how to take advantage of [them was a challenge]."
The Right Target
Jed Kolko, chief economist with Trulia, an online real estate marketplace: "There were a couple of states [including California] where the tax credit was for newly built homes and not necessarily for first-time buyers. I lived in California at the time, and a housing shortage was not our main housing problem at the time. Targeting newly built homes tends to stimulate construction. Too often our starting point and answer in housing policy is, we need more home ownership. The last few years disabused us of that notion.
Improving Policies in the Future
NAHB's Brady: "It would be more effective if you had one package that over time gradually declines. Monetization of the tax credit would have been a huge benefit. The automobile industry's Cash for Clunkers is good example of how to monetize. If we could combine the tax credit with correct underwriting, that could be effective."