Thursday, May 13, 2010

The wastefulness of the California home buyer tax credit coming to light

From this article:

Funding for the credit could be used up within three weeks, said Michael Tessaro, a Realtor with East Bay brokerage J. Rockcliff Realtors and a director with the California Association of Realtors.
The overlap window in May and June to take advantage of both the state and federal tax credit prompted many buyers to delay closing escrow until May so they also could apply for the state credit, Tessaro said.

Three clients decided to delay closing escrow on homes until this week so they could get both credits, said Faramarz Moeen-Ziai, a mortgage banker with the San Ramon-based Bank of Commerce Mortgage.

Even with very generous NAR assumptions of 18% of purchases being stimulated by the incentive the cost per sale will be ~$54,000. As you can see above the number of people were buying anyways and just lengthen the escrow of the house they were already purchasing to double dip on tax credits. It'd be really interesting if somebody commissioned a study and interviewed a sample of people who received the credit and see if they said that they wouldn't have purchased a home without the California credit. I am betting the number of people who claim this is true is much less than 18%.

I've spoken on the wastefulness of the tax credit before. Here and here (make sure you read the comments). Some excerpts:
It (the tax credit) only works if new demand is created not if it just goes to pay off existing demand. The size of the market is so huge relative to the tax credit that it literally a drop of water on a hot plate.. instantly boiled away in a flash of steam.

I think history will show the above bolded statement to be exactly correct.
The tax incentive will apply to 20,000 homes (200 million divided by 10,000 dollar). The CAR prediction for home sales for 2010 is 527,000 or 43,916 homes a month average. First time homebuyers are 47% of the market. So the tax incentive would go to slightly less than one months worth of first time home buyers (43,916 * .47 = 20,640). If I wanted to get the tax credit it would be extremely difficult to time a purchase and get. Escrows are lasting anywhere between 30-60 days if it's a relatively clean sale.. You have a 30 day window in which to close and (MAYBE!) get the credit. One lost piece of paperwork, one appraisal coming in low and needing re-ording, one thing wrong and you don't get the credit. If everything goes right you still aren't assured to get the credit since the money is limited and it is first come first served. There is a very long lag in the home purchase process, making the tax credit a crap shoot for purchasers.

What people are doing is that people who were buying anyways then just extended their escrow to close as soon as they were eligible for the credit. Anyone buying recently thinking they will get the credit is a fool.
The State could literally create more jobs by buying $200 million of new homes and then burning them to the ground. That plan would be MORE EFFICIENT than the one currently on the table, that is how bad this plan is.
I never went laid out the math in a discrete post but have put all the constituent parts on the blog and have no doubt the above is true.

This was truely a $200 million boondoggle that anyone with any bit of understanding of the market could see coming.

One last summary quote and a proposed alternative for creating demand in a less wasteful fashion if you just have $200 million burning a hole in your pocket from the previous posts:
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.

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