What happens when you give people money to buy houses
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Illustration: Aïda Amer/Axios
One part of Democratic presidential candidate Kamala Harris' economic plan is a $25,000 tax credit for first-time homebuyers.
Why it matters: We've been here before. In the depths of the financial crisis, Congress passed a similar $8,000 credit — it was hugely popular — but it was also suited to the economic circumstances of the time. Today, not so much.
Flashback: Back in 2009, when the last credit was enacted, home prices were in free fall — after the housing bubble burst — there was an over-supply of homes, and mortgage rates were falling.
- The idea was to use the credit to spur demand and stabilize the housing market.
- "The market was in free fall, and this was a way to put a floor under the decline," says Mark Zandi, an economist at Moody's.
No surprise, giving people thousands of dollars was popular. As a real estate editor at the Wall Street Journal back then, this reporter tracked massive reader interest in the tax break — which was amended, increased, and extended after passing in 2008.
The results: An estimated 1.4 million used it, according to one count from 2010, after it expired. It cost about $10 billion.
- Many of these folks would likely have bought a house anyway — and at least one report credits lower mortgage rates with the housing market stabilizing.
- The credit may just have pulled sales forward, Zandi says, but that was significant at the time anyway in stabilizing prices in the market.
State of play: Circumstances couldn't be more different now. There's a shortage of available homes keeping prices high, plus record high mortgage rates making homebuying unaffordable.
- Giving buyers extra money for houses right now would increase demand and "translate quickly into higher prices," says Zandi.
Yes, but: The credit is only one part of Harris's proposal — it also includes tax breaks for homebuilders who build starter homes, as well as those who rehabilitate older housing stock. There are provisions to lower rent prices, as well.
- All told, the campaign says such policies could lead to 3 million new housing units over the next four years.
- If you time the credit to come after all that supply is available, then the situation looks different Zandi says.
- "You've got to get the timing right."
