Considering how quickly the Senate is moving on a housing bailout bill (cloture scheduled for 2:15 Tuesday), it is surprising how universally unpopular some of its provisions are. Apparently Senators believe they have to show Americans they can “do something” on housing, but the details of this bill have few defenders. Consider these reactions to the provision in the bill providing a $7,000 tax credit for those buying homes out of foreclosure:
From a Washington Post editorial:
…is it too much to ask that a bill called the “Foreclosure Prevention Act of 2008” not contain a provision that might, at the margin, encourage home foreclosures? … We refer to a $7,000 tax credit (payable over two years) to anyone who purchases a foreclosed home within a year of the proposal’s enactment. Supposedly, this would help clear the nation’s swollen inventory of repossessed properties, thus propping up home prices more generally. Here’s the catch. For lenders as well as borrowers, foreclosure is an expensive hassle. If at all possible, most banks would rather avoid repossessing a house, which they must then try to resell. But, 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 a Wall Street Journal editorial:
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.
From Bloomberg’s John Berry:
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 the Tax Foundation:
The objective of most sound tax policy is for the tax code to interfere with household and business decisions as little as possible—that is, to let decisions be made on economic fundamentals, not based on their tax treatment. Housing tax subsidies have violated this tenet of sound tax policy and distorted household decisions in several important ways. First, they encourage investment in housing over investment elsewhere in the economy, namely business investment. Secondly—and this is something that should be appreciated more right now—the deductions for mortgage interest and real estate taxes paid grow with the size of the house and the mortgage, encouraging the financing of oversized houses with oversized loans. It would go too far to blame the current housing crisis on the existing tax subsidies, but they certainly haven’t helped matters. Similarly, the large, temporary credits offered by Sens. Isakson and Stabenow would make matters worse.
From the Washington Post’s Steven Pearlstein:
One of the provisions would provide a $7,000 tax credit to anyone who buys a house in foreclosure. This won’t do a thing to avoid foreclosures, or put a dime in the pockets of owners who lose their homes. But it will provide a direct subsidy to banks and other lenders who, to sell their newly acquired property, would otherwise have to lower the price by another $7,000. Now, thanks to [Sens. Max Baucus (D-Mont.) and Charles E. Grassley (R-Iowa)] they won’t have to. But wait, it gets worse. If you’re a homeowner or builder trying to sell a similar house in the same neighborhood, your buyers would not be entitled to the tax credit. So that means that, thanks again to Max and Chuck, you could lose a sale or have to lower your price $7,000 to compete.
As a general principle, an explicit federal subsidy for the purchase of certain homes is both bad tax policy and bad housing policy. This subsidy rewards those who have been the most irresponsible. It would benefit homeowners at any income level who either irresponsibly borrowed all of their home equity or took out a loan that they could not repay but hoped to profit from by reselling the property in a rising market. However, those who have made the effort to pay their mortgages on time would not be assisted at all, regardless of their financial circumstances.