Housing Gets Sick on Keynesian Roller Coaster

New home sales data have been gathered by the U.S. Census Bureau since the early 1960s. In May, they dropped to their lowest level in recorded history, increasing the risk of the dreaded double-dip recession.

The collapse coincided with the expiration of the federal tax credit for homebuyers in late April that Keynesians told us would restore stability to housing markets. On July 2, President Barack Obama signed legislation that extends the period in which the credit can be claimed until September, and many Democrats are clamoring for the credit itself to be extended as well.

Many nonpartisan economists who have studied stimulus spending have generally concluded that it is counterproductive and destabilizing. The history of the homebuyers' credit provides a case study that illustrates where that conclusion comes from.

The housing stimulus didn't stimulate much, added billions of dollars to our bloated deficit, and wasted tax dollars.

It all began back in 2008, as the recession was just picking up steam. At that point, new home sales had dropped to a level of 500,000 a month, about half the rate of boom times. Congress decided that a tasty incentive to buy a house might help turn the tide.

The first-time homebuyer tax credit was created as part of the Housing and Economic Recovery Act of 2008, which was signed by President George W. Bush on July 30 of that year. It offered a credit of 10 percent of the sale price, or as much as $7,500, and applied to homes purchased between April 8, 2008, and July 1, 2009.

Credit Extension

The Obama administration expanded and extended the program as part of the American Recovery and Reinvestment Act in February 2009. This legislation extended the credit through Dec. 1, 2009, and increased the credit amount to $8,000.

Last November, with the expiration looming, Obama signed into law the Worker, Homeownership, and Business Assistance Act of 2009. This extended the first-time homebuyer credit through April 2010, and included a credit of $6,500 for current homeowners who purchase a house between Nov. 7, 2009, and April 30. This act also raised the income limits for qualifying for the credit.

A look at new home sales suggests that the credit didn't have the intended effect of stimulating a resurgence in the housing market. New home sales, which fuel the construction that can drive gross domestic product growth, failed to rise above the level of 477,000 that they posted in the month that the credit was first passed. It is probably the case that sales would have dropped more without the credit, but a large share of the credits were almost certainly claimed by people who were going to buy a house anyway.

But since the other parts of the stimulus didn't work very well either, there were few people willing to buy a home for any reason.

Signs of Fraud

The credit did, however, waste an enormous amount of your tax dollars.

Last October, I wrote a column in this space discussing the rampant fraud that has been a hallmark of the homebuyer tax- credit program. The problem was the Obama administration decided that the money had to be spent as fast as possible, so it provided the credit to anyone who said they deserved it without requiring that the recipient provide the documentation to support that claim. That led to the credit being awarded to 19,300 people who, upon review, didn't buy a home. Among those receiving the credit were 580 children younger than 18, including a 4-year-old toddler, below the age of legal homeownership.

Although the Internal Revenue Service has increased enforcement efforts since that time, a recent report reveals that fraud is still a significant problem for the program.

Room for Inmates

An updated audit report shows that even after increased enforcement efforts were made, about 2,700 people defrauded the government by claiming a credit for homes purchased before April 9, 2008. In the more recent round of fraud, 1,295 prisoners claimed to have purchased a house while incarcerated (including 241 on life sentences). Most disturbingly, IRS employees themselves played the game, with 87 fraudulently claiming the credit in 2009 and 2010. Altogether, the total cost to taxpayers of legitimate and fraudulent credits exceeded $30 billion.

So the housing stimulus didn't stimulate much, added billions of dollars to our bloated deficit, and wasted tax dollars.

What is worse is what happens now. While some of the plunge in new home sales is attributable to the shifting of sales into April, another part of the drop is related to the expectation of future policy. In particular, a home buyer in July should rationally postpone a home purchase for now, since Congress will almost surely reintroduce the credit some time soon.

More Volatility

So the market intervention created a small surge in home buying while it was in effect, and then depressed purchases until the credit is reintroduced. Thus, in an effort to buttress the economy, the credit program increased volatility in the housing market.

Such an outcome was, sadly, as predictable as can be. A 2003 study of Keynesian policies in 91 countries performed by economists Antonio Fatás and Ilian Mihov and published in the Quarterly Journal of Economics, concluded that, "governments that use fiscal policy aggressively induce significant macroeconomic instability."

From now on, economic releases should have the following disclaimer in an opening footnote, "The economic roller coaster you are riding has been presented to you by your friendly neighborhood Keynesians."

Kevin A. Hassett is a senior fellow and the director of economic-policy studies at AEI.

Photo credit: iStockphoto/Andy Dean

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About the Author


Kevin A.
  • Kevin A. Hassett is the State Farm James Q. Wilson Chair in American Politics and Culture at the American Enterprise Institute (AEI). He is also a resident scholar and AEI's director of economic policy studies.

    Before joining AEI, Hassett was a senior economist at the Board of Governors of the Federal Reserve System and an associate professor of economics and finance at Columbia (University) Business School. He served as a policy consultant to the US Department of the Treasury during the George H. W. Bush and Bill Clinton administrations.

    Hassett has also been an economic adviser to presidential candidates since 2000, when he became the chief economic adviser to Senator John McCain during that year's presidential primaries. He served as an economic adviser to the George W. Bush 2004 presidential campaign, a senior economic adviser to the McCain 2008 presidential campaign, and an economic adviser to the Mitt Romney 2012 presidential campaign.

    Hassett is the author or editor of many books, among them "Rethinking Competitiveness" (2012), "Toward Fundamental Tax Reform" (2005), "Bubbleology: The New Science of Stock Market Winners and Losers" (2002), and "Inequality and Tax Policy" (2001). He is also a columnist for National Review and has written for Bloomberg.

    Hassett frequently appears on Bloomberg radio and TV, CNBC, CNN, Fox News Channel, NPR, and "PBS NewsHour," among others. He is also often quoted by, and his opinion pieces have been published in, the Los Angeles Times, The New York Times, The Wall Street Journal, and The Washington Post.

    Hassett has a Ph.D. in economics from the University of Pennsylvania and a B.A. in economics from Swarthmore College.

  • Phone: 202-862-7157
    Email: khassett@aei.org
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