Homebuyer credit spurs sales but costs taxpayers

The homebuyer tax credits passed as part of the Obama stimulus have proven wildly popular with homebuyers, but the staggering cost to taxpayers has raised concerns over whether such a bailout is worth it.

"It's helping stabilize the housing market, and it's keeping prices from falling further," said Don Coffin, a professor of economics at Indiana University Northwest.

"But you have to decide how much of a benefit that is."

The U.S. Congress' Joint Committee on taxation pegs the combined price at $10.8 billion of the extension of the first-time homebuyer credit to April 2010 and a new one for existing homeowners passed earlier this month. When the cost of the credits already collected under the program's first eight months are added in, the figure approaches $20 billion.

There's no doubt stimulus programs overall are leading to economic growth, Coffin said. Economists estimate the Obama stimulus was responsible for about one-half of the 3.5 percent gain in U.S. Gross Domestic Product notched in the third quarter.

But adding up the direct benefits of the homebuyer credit is no easy task, with critics charging many of the homes being sold thanks to the credit eventually would have sold anyway, and perhaps at higher prices once the market recovers.

Coffin said because nothing quite like the homebuyer credit has ever been done before, coming to consensus on a methodology for measuring the benefit will take some time.

One group that is attempting to add up the benefits is the National Association of Realtors, which claims much of the third quarter's jump in home sales was due to the first-time home buyer credit.

Total existing home sales jumped 11.4 percent to a seasonally adjusted rate of 5.3 million in the third quarter as compared to 4.76 million units in the second quarter, according to the association. That was the strongest sales activity in more than two years.

"We can’t underestimate just how powerful a catalyst the first-time home buyer tax credit has been for the housing sector," said Lawrence Yun, chief economist for the National Association of Realtors. "It's given buyers the confidence they needed to get off the fence and take advantage of extremely affordable housing conditions."

The National Association of Realtors estimates 1.2 million homebuyers took advantage of the first-time homebuyer credit through October. The association calculates those sales and spin-off transactions contributed $22 billion in spending to the U.S. economy, with each home sold generating $63,000 in additional economic activity.

The National Association of Realtors cheered loudly when Congress on Nov. 5 extended the first-time homebuyer credit and added a credit for current homeowners looking to buy a new home.

"Extending and expanding the homebuyer tax credit will enable even more families to take advantage of current low interest rates and affordable prices to invest in their future through homeownership," said National Association of Realtors President Charles McMillan.