Why Is the Senate Passing a Bill That Increases Foreclosures and Depresses Home Prices?

Conn Carroll / April 08, 2008

The Heritage Foundation has been raising doubts about the Senate’s efforts to “do something” on the housing crisis for weeks now. With a vote scheduled for 2:15 PM today, it seems the rest of nation is catching on to the fact that the principles in this bill will only increase foreclosure’s and depress home prices. But don’t take our word for it:

From the Associated Press: “It’s touted as easing the foreclosure crisis and boosting demand for housing, but critics warn that a bill before the Senate might actually encourage foreclosures and drive down house values.”
From the Washington Post: ” …by making it cheaper to buy a foreclosed house than a comparable unforeclosed property, the tax credit makes it more feasible to sell one. The cost and hassle — for the lender — of foreclosure go down, and the benefits go up. Other things being equal, lenders would be that much more likely to foreclose — rather than to help homeowners stay in their houses on modified terms.”
From Bloomberg News: “The $7,000 credit, which would be paid over two years, is as likely to depress values as to prop them up. Why provide a credit to a buyer that’s also going to help a lender sell a property when a hard-pressed homeowner in the same neighborhood is also trying to sell his property, possibly to avoid a foreclosure? Might that other owner not feel pressure to lower his asking price in the face of an effective reduction in the price of the foreclosed property?”
From National Review: “Johnny Isakson, a Republican from Georgia, wants to give a $7,000 tax credit to people who buy foreclosed properties, and the bipartisan bill in the Senate includes this idea. Let’s count the ways it is a bad one. First, it is unnecessary … Second, it is therefore inefficient …Third, it is grossly unfair. People who bought a home they could afford and honored their obligations will take a hit. They might have to drop their selling price by $7,000 to match the foreclosed property up the street. The bill would punish these people, for no real benefit to the economy.”
From the San Jose Mercury News: “Meanwhile, a buyer of a foreclosed home would get a $7,000 tax credit. That could actually encourage foreclosures and further drive down real estate prices.”
From City Journal: “What it will do, however, is ensure that homeowners not in foreclosure are penalized if they try to sell—since the few potential buyers taking a chance in the current climate will insist that sellers cut their prices to compete with the tax credit for that foreclosed house down the street. And it means that when the market finally does find a bottom—if it does so before the tax credit expires—that floor price will be higher than it would otherwise have been, because buyers setting the price on foreclosed homes will have that extra government subsidy with which to bid.”
From The American Prospect: “While there could be some rationale to having a credit like this for homes that had already been foreclosed and been allowed to deteriorate, it makes no sense to allow the credit to apply to homes where the process has not yet been completed. This effectively gives banks an incentive to carry through the foreclosure instead of trying to work out new terms with the homeowner.”
From the Wall Street Journal: “The main Republican contribution (thanks to Georgia’s Johnny Isakson) is a $7,000 tax credit for those buying homes out of foreclosure. This means that Americans who behaved responsibly and paid their mortgage but are now trying to sell their homes will have to cut their offering price by $7,000 to compete with foreclosed properties nearby. Thus does the Senate contribute once again to tax fairness and personal responsibility.”