Housing Tax Credit: Did it boost the housing market?

The $8000 first time home buyers tax credit seems to have boosted the sales of housing. The following graphic gives my estimates of the total impact on the value of homes sold since the passage of the bill in January.

Including both new and existing homes and valuing the sales at their median price, total housing sales increased by about $16 billion through September. It is, of course, very difficult to measure how much of the increase is attributable to a natural increase in demand and how much is attributable to an increase in demand derived from the tax credit alone. I estimate two distinct effects: the direct effect of the extra money pouring into the housing market and the indirect effect from the induced change in prices.
In normal times according to the National Association of Realtors, about forty percent of sales go to first time home buyers. The tax credit likely increased this number. I don’t know how much but I assume 50 percent is a conservative number. Under this assumption, total outlays under the tax credit were $14.1 billion through the end of September, slightly more than the CBO’s scoring of the program ($11 billion) and slightly less than NAR’s estimate ($15.2 billion).

I assume that the $14.1 billion has a direct one-for-one impact on the demand for housing. This impact is shown in the figure as the difference between the solid black and the dashed black lines. The estimated impact has grown through the year. The sharp rise between April and June reflects ordinary seasonal fluctuations in demand. These data are not seasonally adjusted.

In addition to the direct effect, the subsidy has an indirect effect through induced price changes. Given an estimated price elasticity of demand, the subsidy pushed average house prices up by about 4 percent (My estimate is just below that of Goldman Sachs who estimated a little more than 5 percent. They must have estimated a slightly higher demand elasticity.) This price effect induces sales of existing homes. Because of the higher price, existing home owners have an incentive to sell their house and either rent (less likely) or buy a new home (more likely). This impact is small relative to the direct effect and is shown as the difference between the dashed red and dashed black lines.

In total, I estimate that the existence of the subsidy has boosted the value of housing sales between January and September by about $17.3 billion.

There is no question that this tax break helped the housing market. An extra $17 billion likely kept some home builders in business and it must have paid the bills of quite a few real estate agents. Whether or not the program was worthwhile depends on the public policy decision of whether or not we want to subsidy the housing market. There are no macro side effects of the program as designed.

Whether or not the tax credit is extended (and it looks like this is a done deal), the housing market is likely to decline in the coming months. Because the program was expected to expire this month, most households eligible for the program and able to buy a house have already taken advantage of the tax credit—see the 9 percent surge in existing home sales in September. The majority of these households would have bought a house sometime in the next year without the subsidy and the tax credit simply changed the timing of their decision. With the extension, I expect the value of sales to fall by about $9 billion over the next several months and to fall by the remainder as the credit is phased out.

Of course congress looking ahead to midterm elections hopes that underlying demand for housing will surge by the time the credit expires, disguising the tax credit induced slump. It is possible but we are going to have to see a more robust labor-market recovery before this can happen.