Brookings Institute & Goldman Sachs Weigh in on the $8,000 Tax Credit

Goldman Sachs released a report last week on the effects of the $8,000 first-time buyer tax credit on the housing market. Below is a commentary on the report and the WSJ article, Uncle Sam Adds 5% to Prices of Homes, Goldman Says from Calculated Risk.

Note that Goldman Sachs estimates the first-time home buyer tax credit probably cost around $80,000 per additional home sold. The Brookings Institution in a recent paper estimates that the tax credit cost the government about $43,000 for each additional home sale it produces. (I think we're into semantics territory; that is a very big difference. They are obviously using different models. Either way, that is a huge, huge cost.)

Uncle Sam’s interventions in the housing market have pushed home prices 5% higher on a national average than they would have been otherwise, Goldman Sachs estimates in a report released late Friday.

But these artificial props won’t last forever and may have created a false bottom in the market. “The risk of renewed home-price declines remains significant,” Goldman economist Alec Phillips writes in the report, “and our working assumption is a further 5% to 10% decline by mid-2010.”

In the research note, Phillips discussed how policies have reduced foreclosures, and stimulated demand with both the first-time home buyer tax credit and "abnormally low mortgage rates". Phillips wrote (no link):

"In 2010, we expect some of these supports to fade. Fed and Treasury purchases of mortgage-backed securities will taper off, and the pause in foreclosures created by federal mortgage modification programs may end.

The federal tax credit for first-time homebuyers appears likely to be extended for at least a few months, but probably no longer than through the first half of 2010."

Based on Goldman's estimates, the first-time home buyer tax credit probably cost around $80,000 per additional home sold. Ouch.

The report isn't all negative. Goldman believes "the brunt of the price decline is behind us" and the outlook is uncertain: "the cloudy policy outlook adds to our already considerable uncertainty of where house prices will ultimately bottom".

RealCentralVa.com points to a WSJ article that reports on another viewpoint from the Brookings Institute:

Ted Gayer, a scholar at the liberal Brookings Institution, argued in a recent paper that the credit costs the government about $43,000 for each additional home sale it produces. That is because most of the two million or so home buyers expected to claim the credit would have bought a house anyway. Only about 350,000 were additional buyers. Expanding the credit to make all home buyers potentially eligible would swell the government’s cost per additional home sale to more than $250,000, said Mr. Gayer, co-director of economic studies at Brookings.