Why Arnold's proposed tax credit is extremely wasteful..

“Third, to stimulate other construction jobs, you will receive a proposal for homebuyer tax credits of up to $10,000 for the purchase of new or existing homes.” (Gov. Arnold Schwarzenegger, State of the State Speech, 1/6/10)

The new proposed tax credit is for $10,000 for a purchase of a new or existing home. $200 million is going to be set aside for this purpose. This means that 20,000 buyers would be getting the credit. To put this in context there is going to about 540,000 sales this year, or average 45,000 sales a month. Less than one half of one month sales would get the credit. It would literally be a free for all to try and rush to get the credit. I could see many people wanting and expecting to get the credit not get it because it would run out instantly. Now this would fit in fine with the governments goal to encourage sales but if you bought a home expecting (or NEEDING) to get the credit and didn't get it.. that is a very bad thing. Also it would move sales forward into a very small slice of time and I could see many escrows being cancelled once the credit runs out.

For its main point of stimulating construction jobs it would fail miserably. By far the most jobs are created through new home construction. New home sales averaged 3,000 homes a month in 2008. So a half of month of sales would mean 1,500 new homes would be purchased. It would imperceptible in the jobs data to see the "improvement" caused by these sales. This would be a $200 million boondoggle, an extremely expensive way of gaining very few jobs in a cash strapped state. I hope the Governor realizes that and saves the money for education or medical. I believe the Governor had his brokers license (he saved the "loop hole" for four year degree people to get a brokers license last year) at one time and so would naturally be pro-housing.. but this is a very poorly designed measure.

The measure would largely just give money to people who were buying homes anyways. It would pull forward demand instead of create it.

If the Governor just has to spend $200 million on housing, it would be much better used either funding the state housing agencies (CALHFA) for loans or making the credit much smaller ($1,000 - $2,000) or limit it to new homes like the previous credit to be less wasteful. I respect the very difficult choices that need to be made right now but this is really an easy one as far as economic benefit.

Here is the statistics showing the stimulus would be far too small relative to the size of the market.


Here is the new homes data.