As housing credits end, were they worth the cost?

Louis Johnston From economist Louis Johnston, St. John’s University | College of St. Benedict

The home buyer tax credits ($8,000 for first time buyers, $6,500 for repeat buyers) will expire on April 30. In a Tuesday post , Paul focused on how the end of the credits may affect the housing market.

But did the credits help the economy in general?

Economists love the phrase, “There’s no such thing as a free lunch.” In a world of scarce resources, we all need to make choices, and every choice we make has benefits and costs.

A good way to make choices is to ask if the extra benefits we earn by making that choice exceed the extra costs.

The credits were a policy choice, and in using some of the government’s scarce resources this choice created benefits and costs. Did the benefits exceed the costs?

The Congressional Budget Office estimates the total expense of the credits will be about $14 billion. But that’s not the only cost.

Economists consider both the monetary costs and the value of the alternatives to the credits that were not pursued. These opportunity costs, not just the dollars spent, must be compared to the benefits of the program to evaluate its effectiveness.

What could the federal government have done with $14 billion instead of enacting the credits?

There are many possibilities. For example, it could have use those resources to:

• Help existing homeowners who are having trouble paying their mortgages rather than subsidizing new homeowners;

• Enact across-the-board tax cuts rather than awarding tax credits only to home buyers;

• Pass along additional funds to state governments to help with their budget problems;

• Reduce the federal budget deficit.

When we add together the $14 billion dollar monetary costs of the credits to the value of any one of these alternatives, the case for the credits looks much shakier than when only the benefits are considered.

It is possible that the when all is said and done the home buyer credits will pass this cost-benefit test. Advocates say the credits have increased home demand and stabilized the housing market, benefiting building supply companies, construction equipment makers, title companies, and other firms and driving overall economic activity higher than it would been been otherwise.

However, there is one final, nagging question about the credits: Were they just an attempt to re-inflate the housing bubble?

If so, we have already seen the costs of this type of policy. I would add these costs in as well, which makes it even less likely that the home buyer credits were a good deal for the economy as a whole.

Johnston teaches economics at St. John’s University and the College of St. Benedict and is a regular voice on MPR News.

  • Bill Graves

    Hi Louis – glad you’re still collaborating with MPR (I took one of your Symposium classes in 2002)

    The tax credit (plus advice about interest rates from MinnEcon!) definitely pushed me to buy a house a year or two before I would have otherwise. Friends my age have had similar experiences. I don’t know if the economic value of accelerating home purchases is worth the cost mentioned in this post, but I know that it has been a motivating force for both buyers and sellers in the Minneapolis/St. Paul area. When I started looking two months ago there were about 500 houses showing up on MLS in the specific areas I was looking to buy. Now its down to about 400, and I would bet it goes down significantly further as we approach that April 31st date.

  • Matt

    Another student of Louis here…

    I bought my first home in large part because of the credit, and in large part because this recession put homes within the reach of recent college grads such as myself.