Friday, January 1, 2010

Is The Homebuyer Tax Credit Too Small?

Tim Iacono from The Mess That Greenspan Made points out that the homebuyer tax credit is relatively small compared to the average price of homes and is not even keeping up with home inflation. He argues that if the government wants to increase home prices (say to increase property tax revenues), they will have to significantly increase the tax credit.

The $8,000 homebuyer tax credit in relation to the average sales price for existing homes over the summer of about $220,000 (per the National Association of Realtors) is:

3.6%

The percentage that home prices have risen from May to October (per the seasonally adjusted S&P Case-Shiller 20-City Home Price Index) is:

3.4%

Obviously there are other ways to look at this. For example, relative to the median sales price for existing homes of about $175,000, the $8,000 tax credit is 4.6 percent, more than a full percentage point greater than the increase in seasonally adjusted home prices. Or, using unadjusted Case-Shiller data, home prices have increased 5.3 percent since the spring, greater than either tax credit percentage.

Whatever figures you use, the tax credit and the home price gains are pretty close.

There is clear message here for the U.S. government. If they really want home prices to go back up, they need to drastically increase the tax credit. Maybe they should double it to about $15,000 next summer and then move it up to $25,000 or so in 2011, increasing the tax credit regularly as needed to keep home prices rising.

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

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