By RANDALL W. FORSYTH

Barrons, October 21, 2009

THE FEDS SEEM INTENT UPON REFLATING the housing bubble. Not the Federal Reserve, as you may have read elsewhere, but the federal government. Following the cash-for-clunkers idiocy, the federal government may extend its subsidy for homebuyers. As an inefficient use of taxpayer money, clunker cash pales besides the homebuyer handout. With housing affordability currently the best it’s been in most of our lifetimes, with marked-down home prices and mortgage money in the 5% range, you wouldn’t think homebuyers would need a subsidy. But there it is, and it’s a lot more expensive than you think. How’s that possible? Gayer figures that of the 1.9 million homebuyers that will get the $8,000 tax credit, 85% would have bought a house anyway. The price tag of $15 billion — about twice what Congress had intended — he reckons will result in approximately 350,000 additional home sales, at a price tag of $43,000 for each additional sale. The National Association of Home Builders, not exactly a disinterested bunch, figures the subsidy would boost house sales considerably more, by 700,000 homes. That implies each of those additional sales would cost American taxpayers only $133,000 — still “a very expensive and poorly targeted subsidy,” writes Gayer. Unbelievable, you say. But remember, everybody gets the subsidy, both the vast majority who would have bought any way and yet are getting a windfall, plus those who were lured into the market by the largesse. It’s like buying free drinks for a crowd that’s bellied up to the bar with their wallets open already. In actuality, that cost does not come in the form of checks being mailed out to homebuyers. They get an $8,000 credit to their 2009 taxes when they file their return next April 15 — a “tax expenditure” in the jargon of Washington. Either way, there’s less money in the Treasury after it racked up a $1.4 trillion deficit in the fiscal year just ended — equal to 10% of gross domestic product, a percentage not seen since the nation was paying to fight World War II. “There are two larger points we should not lose sight of,” Gayer writes. “First, tax expenditures are not a free lunch. The billions of dollars spent on the tax credit will ultimately have to be paid back through higher, economically distorting taxes. And while a tax credit is unlikely to be the straw that breaks the camel’s back, our growing debt burden is something to fear. “Second, government policies to promote homeownership (or, more accurately, home-borrowership) were partial contributors to our housing and credit market problems,” he continues. “Ultimately, we need to decrease the government’s housing incentives, including the mortgage-finance subsidies, the mortgage-interest deduction, and the favorable capital gains treatment for housing. A good place to start this weaning would be by not extending or expanding the home-buyer tax credit.”

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