Thursday, July 15, 2010

Homebuyer Credit or Taxpayer Gift?

So what’s the deal with the New Jersey homebuyer tax credit? This program would give homebuyers in the state a tax credit worth up to $15,000 spread over three years. The bill (A1678) passed the legislature with overwhelming bi-partisan support and landed on the governor’s desk on June 10. Yet, Chris Christie has yet to sign it.

On New Jersey 101.5’s “Ask the Governor” program this week, Christie said he likes the idea, but will only sign it if he can figure out where the money is coming from. Proponents of the bill say it will spur construction and create jobs, which will increase revenues in both the realty transfer fund and income taxes, which will offset the cost of the program. A look at the numbers behind the program casts serious doubt that this will be the case.

The program sets aside $100 million from the property tax relief fund as a tax credit for people who purchase a home after the program goes into effect. Of this amount, $75 million is set aside for the purchase of newly constructed homes and $25 million for existing home sales.

Wow! $100 million sounds like it will go far, doesn’t it? Not really. The program would give these purchasers a credit of $15,000 or 5% of the sales price, whichever is lower. For the sake of argument, let’s say that the typical home price is $250,000. That would give the average homebuyer a credit of $12,500.

The $100 million in the kitty would provide tax credits to just 8,000 homebuyers. Hmm, sounds less impressive now. It’s a shame the legislature didn’t know this before they passed the bill, you say. Actually, they did (or at least the Senate did). The Office of Legislative Services provided a fiscal impact statement in late May that laid out just such a scenario – in fact, theirs was even more conservative.

But wait, there’s more. Let’s see how this would actually work if the program was in place. Remember the pot is divided 75/25 between new and existing construction. Using my generous estimate, that equates to 6,000 purchasers of new homes and 2,000 purchasers of existing homes who would qualify for the credit.

There were about 12,000 building permits issued for new homes in New Jersey last year. Even if some went unsold, at least 10,000 new homes were purchased last year. There is some debate on the impact that the now-expired federal tax credit had on those sales numbers. Let’s make a hypothetical assumption that one-third of those sales were driven by the tax credit and two-thirds would have happened anyway because people needed to move. In other words, we could expect that about 6,500 newly built homes will be sold in New Jersey this year without any tax credit.

Now, proponents say that the availability of a state tax credit will spur more buyers into the marketplace and thus increase demand. Let’s accept that premise and estimate that demand doubles and 6,000 homes are sold within the first six months of the program.

Well, what happens after the credit program is shut down? Do those buyers stay in the market and keep housing demand high? If we look at the experience of the federal credit program, the answer appears to be “No.”

The numbers are even more astounding if we look at how the credit will apply to sales of existing homes. According to state figures, more than 110,000 existing houses were resold last year. That translates to about 300 a day. This means the $25 million pot for existing home sales tax credits will be snapped up within a week of the program going into effect. One week!

Considering how lengthy the sales and mortgage process is, a homebuyer’s likelihood of closing on their purchase within the seven day window this credit program is available will be more a matter of luck than planning. “Mr. and Mrs. Jones, here are the keys to your house, and congratulations - you just won $15,000!”

This analysis raises a number of doubts about the economic impact – or ripple effect – of the New Jersey homebuyer tax credit. First of all, if the purpose is to spur economic activity in the form of construction jobs, then why isn’t it limited to new home sales only?

But even if the entire pot was dedicated to new home sales, it doesn’t seem to be large enough to keep demand high for enough time to ride out the current slump in the housing market. If I were a builder, I don’t think I would be hiring more workers on the dubious potential of this program.

And finally, why is the program so generous at $15,000 a pop? The federal program gave an $8,000 credit for first-time homebuyers and a $5,000 credit for current owners. These amounts appeared to be adequate to keep the housing market from dipping lower than it did.

Of course, none of this says anything about whether a tax credit of any sort is particularly smart economics. Some analysts claim that the New Jersey housing market is still overvalued and that prices need to come down further before buyers will return. Basically, they argue that the tax credit program has interfered with the open market and delayed a necessary price correction. Perhaps that’s why the eight Assembly members who voted against the bill happen to be among the most ideologically conservative in the legislature.

In any event, it’s difficult to see economic benefit in taking $100 million dollars in taxpayer money and giving it to 8,000 homebuyers for doing what they would probably have done anyway. Given New Jersey’s current fiscal crisis, maybe the state would be better off using the money to build a few hundred houses itself and sell them for a profit.

1 comment:

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