An Economic Analysis of the Homebuyer Tax
Credit
Mark P. Keightley
Analyst in Public Finance
December 1, 2009
Congressional Research Service
7-5700
www.crs.gov
R40955
CRS Report for Congress
P
repared for Members and Committees of Congress
An Economic Analysis of the Homebuyer Tax Credit
Summary
There have been three different versions of the homebuyer tax credit enacted since the summer of
2008. In July 2008, Congress enacted a first-time homebuyer tax credit as part of the Housing and
Economic Recovery Act of 2008 (HERA; P.L. 110-289). The tax credit was originally set to
expire on July 1, 2009. The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-
5) increased the tax credit’s value and extended its expiration date to December 1, 2009. Most
recently, the Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA; P.L. 111-
92) extended the tax credit through the first half of 2010 and expanded it to repeat homebuyers.
The Joint Committee on Taxation (JCT) has estimated the 10-year cost of the most recent version
of the tax credit to be $10.8 billion. In comparison, the original HERA version of the first-time
homebuyer tax credit was estimated to cost $4.9 billion over 10 years, while the 10-year cost of
the modifications made by ARRA were estimated to be $6.5 billion.
The recent changes enacted by P.L. 111-92 extend the tax credit to homebuyers who enter a
written binding contract before May 1, 2010, and complete the purchase before July 1, 2010.
These deadlines are extended by one year for members of the military and other individuals who
serve on qualified official extended duty outside the United States for 90 days before May 1,
2010. The tax credit for repeat buyers is capped at $6,500 and is limited to those who have owned
and lived in their current home for five of the last eight years. Other changes include an
expansion of the maximum credit income eligibility limits to $125,000 for individuals and
$225,000 for married couples, up from $75,000 and $150,000, respectively. Lastly, there exists an
$800,000 limit on the purchase price of a home.
This report provides an economic analysis of the homebuyer tax credit. Recent data suggest that
home prices in general may be stabilizing and that the home inventory is beginning to return to a
more normal level. Given the close proximity of these improvements to when the homebuyer tax
credit was enacted by HERA and first modified by ARRA, one could argue that the tax credit was
the cause of these improvements. A correlation, however, does not imply causation. Around the
same time, home prices were falling and mortgage rates were approaching recent historic lows,
which may have led more homebuyers to enter the market.
Results presented in this report suggest that lower home prices and low mortgage rates were
quantitatively more important in stabilizing the housing market than the tax credit. For example,
the effect of home prices and mortgage rates on the typical buyer’s mortgage payment is
estimated to have been about eight times that of the first two versions of the tax credit. In
addition, lower home prices and mortgage rates tended to benefit first-time and repeat buyers, as
opposed to the tax credit which until recently just benefited the former.
Estimates of the number of additional home purchases that can be attributed to the ARRA and
WHBAA versions of tax credit are presented and compared to those reported by private industry
analysts. The estimates raise questions about those reported by industry analysts, as well as
questions about how effective the tax credit may have been at reducing the home inventory. The
analysis also investigates the tax credit’s ability to support the housing market moving forward.
This report will be updated as warranted by legislative events.
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An Economic Analysis of the Homebuyer Tax Credit
Contents
Introduction ................................................................................................................................ 1
The Homebuyer Tax Credit ......................................................................................................... 2
Homebuyers in 2008 ............................................................................................................. 2
Homebuyers in 2009 and 2010 .............................................................................................. 2
Number of First-Time Homebuyer Tax Credits Claimed ........................................................ 4
Housing Market Conditions ........................................................................................................ 5
Home Prices.......................................................................................................................... 5
Home Inventory .................................................................................................................... 7
Other Indicators .................................................................................................................... 7
Mortgage Interest Rates ........................................................................................................ 8
Moving Forward ................................................................................................................... 9
Economic Analysis.................................................................................................................... 10
Home Prices, Mortgage Rates, and the HERA and ARRA Homebuyer Tax Credits .............. 10
Estimates of Home Purchases Attributable to the ARRA and WHBAA Homebuyer
Tax Credits ...................................................................................................................... 14
Continued Housing Market Support and the WHBAA Homebuyer Tax Credit ..................... 16
Figures
Figure 1. S&P Case-Shiller and FHFA Home Price Indices.......................................................... 6
Figure 2. Fixed 30-Year Mortgage Interest Rates ......................................................................... 9
Figure B-1. S&P Case-Shiller Regional Home Price Indices ...................................................... 20
Figure C-1. S&P Case-Shiller Regional Home Price Indices by Price Tier ................................. 21
Tables
Table 1. New and Existing Home Inventory ................................................................................ 7
Table 2. Estimated Reduction In Mortgage Payment from Home Prices, Mortgage Rates,
and the Homebuyer Tax Credit ............................................................................................... 13
Table 3. Estimated Additional Home Purchases Attributable to the ARRA and WHBAA
Versions of the Homebuyer Tax Credit At Time of Enactment ................................................ 15
Table A-1. First-Time Homebuyer Tax Credits Claimed By State............................................... 18
Table D-1. Estimated Reduction In Mortgage Payment from Home Prices, Mortgage
Rates, and the Homebuyer Tax Credit..................................................................................... 22
Appendixes
Appendix A. Tax Credits Claimed On A State-by-State Basis..................................................... 18
Appendix B. Regional Home Prices .......................................................................................... 20
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An Economic Analysis of the Homebuyer Tax Credit
Appendix C. Home Prices By Price Tier.................................................................................... 21
Appendix D. Estimated Reduction In Mortgage Payment Assuming Lower Initial Price ............ 22
Appendix E. Method for Estimating Additional Home Purchases............................................... 23
Contacts
Author Contact Information ...................................................................................................... 24
Congressional Research Service
An Economic Analysis of the Homebuyer Tax Credit
Introduction
There have been three different versions of the homebuyer tax credits enacted since the summer
of 2008. In July 2008, Congress enacted a first-time homebuyer tax credit as part of the Housing
and Economic Recovery Act of 2008 (HERA; P.L. 110-289).1 The tax credit was originally set to
expire on July 1, 2009. The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-
5) increased the tax credit’s value and extended its expiration date to December 1, 2009. Most
recently, the Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA; P.L. 111-
92) extended the tax credit through the first half of 2010 and expanded it to repeat homebuyers.
The Joint Committee on Taxation (JCT) has estimated the 10-year cost of the most recent version
of the tax credit to be $10.8 billion. 2 In comparison, the original HERA version of the first-time
homebuyer tax credit was estimated to cost $4.9 billion over 10 years, while the 10-year cost of
the modifications made by ARRA was estimated to be $6.5 billion.3
Originally, the first-time homebuyer tax credit was intended to reduce the excess inventory of
homes and stabilize falling home prices. The most recently available data suggest that home
prices in general may be stabilizing, at least temporarily. In addition, the home inventory appears
to be returning to a more normal level. Given the close proximity of these improvements to when
the homebuyer tax credit was enacted by HERA and first modified ARRA, one could argue that
the tax credit was the cause of these improvements. A correlation, however, does not imply
causation. Around the same time the homebuyer tax credit was enacted, home prices were falling
and mortgage rates were approaching recent historic lows, which may have led more homebuyers
to enter the market.
This report provides an economic analysis of the homebuyer tax credit. It begins by providing an
overview of the tax credit and presenting data on the number of credits claimed thus far. A review
of current market conditions is then presented. This is followed by an analysis of the effect that
the HERA and ARRA versions of the tax credit had on a typical buyer’s mortgage payment
compared to home prices and mortgage rates. Estimates of the number of home purchases that
may be attributable to the ARRA and WHBAA versions of the tax credit are reported and
compared to private industry estimates. The analysis concludes by investigating the ability of the
tax credit to provide support to the housing market moving forward.
1 The Housing and Economic Recovery Act of 2008 was intended to strengthen the regulation of Freddie Mac and
Fannie Mae, modernize the Federal Housing Administration, and provide assistance for homeowners unable to pay
their current mortgage. For more information on the act see CRS Report RL34623, Housing and Economic Recovery
Act of 2008, coordinated by N. Eric Weiss.
2 U.S. Congress, Joint Committee on Taxation, Estimated Revenue Effects Of Certain Revenue Provisions Contained
In The “Worker, Homeownership, And Business Assistance Act Of 2009”, committee print, prepared by JCT, 111th
Cong., 1st sess., November 3, 2009, JCT-45-09 (Washington: GPO, 2009).
3 U.S. Congress, Joint Committee on Taxation, Estimated Budget Effects Of The Tax Provisions Contained In H.R.
3221, The “Housing And Economic Recovery Act Of 2008,” Scheduled For Consideration By The House Of
Representatives On July 23, 2008, committee print, prepared by JCT, 110th Cong., 2nd sess., July 23, 2008, JCX-64-08
(Washington: GPO, 2008) and U.S. Congress, Joint Committee on Taxation, Estimated Budget Effects Of The Revenue
Provisions Contained In The Conference Agreement For H.R.1, The “American Recovery And Reinvestment Tax Act
of 2009”, committee print, prepared by JCT, 111th Cong., 1st sess., Feb 12, 2009, JCX-19-09 (Washington: GPO,
2009).
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An Economic Analysis of the Homebuyer Tax Credit
The Homebuyer Tax Credit
Homebuyers in 2008
The original (HERA) version of the homebuyer tax credit only applied to first-time buyers who
purchased a home after April 8, 2008, and before January 1, 2009.4 Eligible buyers were allowed
a refundable credit against their federal income tax equal to a maximum of 10% of a home’s
purchase price, or $7,500. The amount of the credit that could be claimed was reduced for
individuals with modified adjusted gross income (AGI) of more than $75,000 ($150,000 for joint
filers), and was zero for those individuals with modified AGI in excess of $95,000 ($170,000 for
joint filers). To qualify for the credit the buyer must not have had an interest in a principal
residence in the last three years. 5
Those who claimed the 2008 first-time homebuyer tax credit must repay the tax credit in equal
installments over 15 years beginning in the second taxable year after the purchase of a home.
Given that interest does not accumulate during the repayment period, the repayable tax credit
equates to an interest free loan with a 16-year repayment period (a 1-year grace period plus 15
years of payments). The annual repayment is equal to 1/15th the amount of the original tax credit.
Should the home be sold or no longer used as the owner’s principal residence, the entire tax credit
is to be repaid in the tax year when such change in use of the property occurs. The recaptured
amount may not exceed any gain realized by the sale of the house.
The 2008 homebuyer tax credit was refundable, which allowed lower-income households with
little or no tax liability to take full advantage of the credit. For example, consider a first-time
homebuyer who owes $5,000 in income taxes. Assuming the buyer and the home purchase
qualify for a $7,500 tax credit, the buyer’s tax liability would be reduced to zero, and the buyer
would receive a $2,500 refund check from the Treasury. In contrast, if the tax credit were
nonrefundable, the buyer’s tax liability would be reduced to zero, but the buyer would receive no
refund check from the Treasury.
Homebuyers in 2009 and 2010
The second (ARRA) version of the tax credit, passed in February 2009, was available for first-
time buyers who purchased a home anytime from January 1, 2009, to November 6, 2009. The
credit amount was set equal to a maximum of 10% of a home’s purchase price, or $8,000. The tax
credit remained refundable, although the repayment requirement was removed. The income limits
remained unchanged so that the credit amount was reduced for individuals with modified AGI of
more than $75,000 ($150,000 for joint filers), and was zero for those individuals with modified
AGI in excess of $95,000 ($170,000 for joint filers).
4 When the tax credit was first enacted the expiration date was set July 1, 2009. ARRA later extended this expiration
date to December 1, 2009, which was extended once again by WHBAA to July 1, 2010.
5 Principal residence is not defined explicitly in the Internal Revenue Code (IRC) section that created the tax credit. For
a more detailed discussion on this issue see CRS Report RL34664, The First-Time Homebuyer Tax Credit, by Carol A.
Pettit. Taxpayers who are allowed the District of Columbia’s homebuyer tax credit are not allowed the first-time
homebuyer tax credit.
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The third and most recent (WHBAA) version of the homebuyer tax credit is available for home
purchases made after November 6, 2009, and before July 1, 2010. A homebuyer must be entered
into a binding written contract before May 1, 2010, and complete the home purchase by July 1,
2010, to qualify for the credit. The credit is available to first-time as well as repeat homebuyers.
For first-time homebuyers, the maximum credit amount is limited to 10% of a home’s purchase
price, or $8,000. The maximum credit amount is reduced to $6,500 for repeat homebuyers. To
qualify as a repeat buyer the taxpayer must have owned and used their previous house as their
principal residence for five consecutive years during the eight-year period ending with the home
purchase. The credit amount is reduced for homebuyers (first-time or repeat) with modified AGI
of more than $150,000 ($225,000 for joint filers), and is zero for those individuals with modified
AGI in excess of $170,000 ($245,000 for joint filers). Purchasers of homes with prices exceeding
$800,000 are ineligible for the latest version of the credit.
The Homebuyer Tax Credit at a Glance
HERA
ARRA
WHBAA
(July 2008)
(Feb 2009)
(Nov 2009)
First-Time Buyers Only
Yes
Yes
No
Maximum Credit
$7,500
$8,000
$8,000/$6,500
Income Phase-Out Range
Single: $75,000 to $95,000
Single: $75,000 to $95,000
Single: $150,000 to $175,000
Joint: $150,000 to $170,000
Joint: $150,000 to $170,000
Joint: $225,000 to $245,000
Repayable
Yes
No
No
Refundable
Yes
Yes
Yes
Applicable Dates
Apr 9, 2008 to Dec 31, 2008
Jan 1, 2009 to Nov 6, 2009
Nov 7, 2009 to June 30, 2010
Maximum Purchase Price
No
No
Yes ($800,000)
The recent changes also include special rules regarding members of the armed forces and
individuals who serve on qualified official extended duty. Specifically, the requirement that a
homebuyer repay the tax credit if their home is no longer used as their principal residence within
the first three years is waived for members of the armed forces and certain other individuals who
must sell their house as the result of government orders for qualified official extended duty. All
other taxpayers are subject to the three-year repayment (or recapture) requirement. In addition,
the tax credit deadlines are extended by one year for individuals who serve on qualified official
extended duty outside the United States for 90 days before May 1, 2010.6
Any homebuyer claiming the tax credit in 2009 or 2010 may elect to treat an eligible purchase as
having occurred in the previous year for tax purposes. The ability to treat a home purchase as
having occurred in the previous tax year enables a homebuyer to receive the benefit of the tax
credit more quickly. For example, a homebuyer in 2009 may claim the tax credit on a 2008 tax
return by filing an amended tax return. Normally, a homebuyer would have to wait until spring
2010 (when 2009 taxes are filed) to claim the tax credit. Likewise, a homebuyer in 2010 would
normally have to wait until spring 2011 to claim the tax credit, but because of this provision can
either claim the credit on a 2009 tax return (if the purchase is made prior to filing the 2009
return), or by filing an amended 2009 tax return (if the purchase is made after filing the 2009
return).
6 Qualified official extended duty is defined in IRC §121(d)(9)(C)(i).
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An Economic Analysis of the Homebuyer Tax Credit
The Department of Housing and Urban Development (HUD) has released conditions under which
the first-time homebuyer tax credit could be “monetized” and made available for use at closing.
The tax credit may either be monetized via a loan to the buyer, or by being purchased from the
homebuyer in an amount not to exceed the tax credit he or she is expected to receive. The tax
credit may only be monetized when the buyer uses an FHA-insured mortgage. Regardless, the
monetized tax credit may not be used to satisfy the FHA required 3.5% down payment. However,
the tax credit may be used to make an additional down payment, to buy down the mortgage rate,
or put toward closing costs. It remains to be seen if the monetization program will be extended to
repeat buyers.
Number of First-Time Homebuyer Tax Credits Claimed
The IRS has recently released preliminary figures on the number of first-time homebuyer tax
credits claimed.7 Thus far, 1.4 million first-time homebuyers have claimed approximately $10
billion worth of tax credits. This includes those who claimed either the $7,500 repayable or
$8,000 non-repayable first-time homebuyer credit for home purchases made between April 9,
2008 and August 24, 2009. The majority of the tax credit claims (approximately 1 million) thus
far have been for the $7,500 credit. The average tax credit claimed was $7,004.
The IRS has also released a state-by-state breakdown of the number and dollar amount of tax
credits claimed. This information is reported in Table A-1 in Appendix A . Roughly 28% of the
number of credits claimed and dollar amount of tax credits claimed were concentrated among
three states: California, Florida, and Texas. This is not surprising given the population of these
states. No other state accounted for more than 4% of all tax credits claimed. The average tax
credit amount claimed ranged from $6,540 (West Virginia) to $7,377 (Utah).
While the IRS data reveal the number of people who have utilized the tax credit, they do not by
themselves provide an indication of how effective the credit has been. This depends partly on
how many additional home purchases can be attributable to the credit. Some fraction of the 1.4
million people who claimed the tax credit likely represented new buyers incentivized into the
market by the credit, while the majority of the other claimants likely were buyers who had
already decided to purchase a home, and simply claimed the tax credit because it was available.
Still, as recent reports are suggesting, some of those claiming the tax credit may have done so
fraudulently.8
It is important to point out that the data reported by the IRS include nearly four months of first-
time homebuyer activity that benefited from the tax credit but that could be argued to not have
been influenced by the credit. The homebuyer tax credit was originally enacted on July 30, 2008,
but could have been claimed retroactively for home purchases as far back as April 9, 2008. Those
who claimed the tax credit retroactively likely did not represent new home buying activity that
7 Internal Revenue Service, “First-Time Homebuyer Credit Provides Tax Benefits to 1.4 Million Families to Date,
More Claims Expected,” press release, IR-2009-83, September 17, 2009, http://www.irs.gov/newsroom/article/0,,id=
213375,00.html. Dates reported were not in the IRS press release, but were obtained from the IRS Media Relations
Office.
8 See, U.S. Government Accountability Office, First-Time Homebuyer Tax Credit: Taxpayers’ Use of the Credit and
Implementation and Compliance Challenges, GAO-10-166T, October 22, 2009, http://www.gao.gov/products/GAO-
10-166T, and Treasury Inspector General For Tax Administration, The Internal Revenue Service Faces Significant
Challenges In Verifying Eligibility For The First-Time Homebuyer Credit, 2009-41-144, Washington, DC, September
29, 2009, http://www.tigta.gov.
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occurred because of the credit since the credit was not available to them when they decided to
purchase a home. Thus, although those that bought a home between April 9, 2008 and July 30,
2008 may have claimed the tax credit, they may not have been incentivized by it.
Housing Market Conditions
This section provides a brief summary of current housing market conditions and identifies risks to
the housing market moving forward. The original intent of the first-time homebuyer tax credit
was to address falling home prices and an elevated home inventory. The tax credit was extended
and expanded to repeat buyers to provide continued support to the housing market and to provide
stimulus to the broader economy. Reviewing current conditions is useful for understanding how
effective the first-time homebuyer may have been achieving its intended objective. Discussing
conditions moving forward is useful for understanding the impact that extending and expanding
the tax credit may have.
Home Prices
There are signs that overall home prices may be stabilizing, at least temporarily. The top half of
Figure 1 plots the S&P/Case-Shiller (Case-Shiller) home price index and the Federal Housing
Finance Agency (FHFA) home price index—two popular measures of home prices.9 After nearly
three years of steady declines, the Case-Shiller index remained stable between March and May of
2009, before increasing in both June and July. In addition, the FHFA index has remained more or
less flat since in November 2008. Still, home price behavior has been different depending on the
particular market considered. Prices in certain markets are still falling, while prices in other
markets have begun to rise. Figure B-1 in Appendix B provides a graphical summary of home
prices for seven metropolitan areas contained in the broader Case-Shiller composite index.
9 The Case-Shiller index measures the prices of repeat single-family home sales in 20 large metropolitan markets and is
generally thought to provide a good measure of overall home prices, although it more heavily weights larger housing
markets, and does not reflect price in smaller Midwest markets. In contrast, the FHFA index measures single-family
home prices in all 50 states. The FHFA index, however, only includes homes purchased with a conventional mortgage
that can be purchased by Fannie Mae or Freddie Mac. The FHFA home price index previously was known as the Office
of Federal Housing Enterprise Oversight (OFHEO) home price index.
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Figure 1. S&P Case-Shiller and FHFA Home Price Indices
January 2000 to July 2009
215
195
175
S&P/Case-Shiller
155
x
e
d
In
135
FHFA
115
95
75
Jan, 2000
Jan, 2001
Jan, 2002
Jan, 2003
Jan, 2004
Jan, 2005
Jan, 2006
Jan, 2007
Jan, 2008
Jan, 2009
Source: Standard and Poor’s and FHFA.
Home prices across the low-, mid-, and high-priced markets are beginning to converge back to a
common path—behavior which is consistent with home price stabilization. During the run-up in
housing, home values across the low-, mid-, and high-priced markets departed from their
historical trend of moving together. Typically home values in the low-priced market increased
fastest as first-time buyers rushed into the market, followed by the mid- and high-priced
markets.10 However, prices across the three tiers have not begun to move in complete unison in
every region of the country which may indicate further price corrections could occur. See Figure
C-1 in Appendix C for a summary of regional housing markets by price tier.
Even with home values across price tiers beginning to appear to stabilize, there are reports that
the share of foreclosures attributable to the high end of the market is increasing. Online real estate
service provider Zillow.com recently reported that the fraction of foreclosures attributable to the
top one-third of the housing market stood at 30% in June 2009.11 This is approximately double
the share of foreclosures that the top one-third was responsible for in 2006. The fall in home
prices at the higher end is likely being driven by foreclosures and rising unemployment, which, in
turn, is re-enforcing foreclosures. As a result, prices of higher-end homes may have some time
before they stabilize fully. While foreclosures are picking up at the higher end of the market, the
share attributable to the bottom one-third of the housing market appears to have fallen from 55%
to 35%. The data suggest that the lower-priced market may be close to stabilizing.
10 One exception is the Las Vegas market which initially witnessed prices in the mid- and high-priced markets increase
faster than the low-priced market.
11 Nick Timiraos, “Foreclosures Grow in Housing Market’s Top Tiers,” Wall Street Journal, October 13, 2009,
http://online.wsj.com/article_email/SB125530360128479161-lMyQjAxMDI5NTE1MjMxMDIzWj.html.
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Home Inventory
Table 1. New and Existing Home Inventory
(measured in months)
Inventory
Inventory
Month
New Existing Month
New Existing
July
2008
10.1
11.0 March
2009 10.7
9.6
Aug. 2008
10.9
10.6
Apr. 2009
10.1
10.1
Sept. 2008
10.4
10.1
May 2009
10.2
9.8
Oct. 2008
11.1
10.2
June 2009
8.8
9.4
Nov. 2008
11.5
11.0
July 2009
7.5
9.3
Dec. 2008
12.9
9.4
Aug. 2009
7.3
9.3
Jan. 2009
13.3
9.7
Sept. 2009
7.5
8.0
Feb. 2009
12.2
9.7
Oct. 2009
6.7
7.0
Source: U.S. Census Bureau and National Association of Realtors.
Notes: NAR estimates for October 2009 are preliminary.
There are also indications that the inventory (supply) of homes on the market may be returning to
a more normal level. The housing inventory is measured as the number of months it would take
the quantity of homes on the market to be sold given the current rate of sales. A stable housing
market has historically been associated with a 5.0 to 6.0 month home inventory. The latest data
presented in Table 1 reveal that the existing home inventory currently stands at an 7.0 months
supply, down from a high of 11.0 months in November 2008. Likewise, the new home inventory
currently stands at a 6.7 months supply.12 This is down from a peak of 13.3 months which was
reached in January 2009.
Other Indicators
Other indicators also suggest that the housing market may be beginning to stabilize. For example,
the National Association of Realtors (NAR) reported on September 1, 2009, that pending home
sales, an indicator of where the market is headed, rose for the sixth straight month, something the
NAR says has not occurred since 2001.13 In response, NAR chief economist Lawrence Yun said
that “the rise in pending home sales is clearly implying that the worst in housing is over.”14 Home
builder confidence also appears to be on the rise. On September 16, 2009, the National
Association of Home Builders (NAHB) reported that builder confidence for the single family
homes market increased for the third consecutive month.15 While builder confidence may be
12 Estimates of the new home inventory are made by the U.S. Census Bureau, while the National Association of
Realtors compiles the existing home inventory estimates.
13 National Association of Realtors, “Pending Home Sales on a Record Roll,” press release, September 1, 2009,
http://www.realtor.org/press_room/news_releases/2009/09/record_roll.
14 Ibid., Interview with NAR chief economist Lawrence Yun, http://link.brightcove.com/services/player/
bcpid36344168001?bctid=36362678001.
15 National Association of Home Builders, “ Builder Confidence Edges Up Again In September,” press release,
(continued...)
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improving, home building activity is still weak. For example, housing starts were at a seasonally
adjusted annual rate of 598,000 in August 2009, compared to a historical average of 1.5 million.16
Homeownership affordability has improved, which may continue to assist in stabilizing the
housing market. For example, according to the National Association of Homebuilders/Wells
Fargo Housing Opportunity Index, homeownership affordability is near its highest level in 18
years.17 Similarly, the NAR First-Time Homebuyer Affordability Index indicates that
homeownership has become more affordable for first-time buyers relative to when home prices
peaked in the second half of this decade.18 Much of the increase in affordability is likely the result
of falling home prices and low mortgage interest rates. If affordability remains high, buyers could
continue to be lured into the market, which could have a positive effect on home prices and help
reduce the home inventory.
Mortgage Interest Rates
While mortgage rates are not necessarily an indicator of the current condition of the housing
market, they are an important determinant of home buying activity. Figure 2 displays the average
interest rate on a 30-year fixed-rate mortgage since July 2006. Also identified are the dates the
homebuyer tax credit was enacted and then modified and enhanced by ARRA. What is important
to note is that although mortgage rates were rising slightly at the time the tax credit was enacted,
they fell shortly after from around 6.5% to slightly above 5.0% by the time the credit was
modified by ARRA. Mortgage rates continued falling until April 2009 when they reached 4.81%,
rose slightly, and fell again. The effect mortgage rates may have had in encouraging home buying
is discussed in the economic analysis section.
(...continued)
September 16, 2009, http://www.nahb.org/news_details.aspx?newsID=9699.
16 U.S. Department of Commerce, Census Bureau: http://www.census.gov/const/www/newresconstindex.html.
17 National Association of Home Builders, “Housing Affordability Continues To Hover Near Highest Level In 18
Years,” press release, August 19, 2009, http://www.nahb.org/news_details.aspx?sectionID=135&newsID=9635.
18 National Association of Realtors, “First-Time Homebuyer Affordability,” press release, 2009,
http://www.realtor.org/wps/wcm/connect/f21f89004f2b1ed5b631f74e813808c1/REL09Q2F.pdf?MOD=AJPERES&
CACHEID=f21f89004f2b1ed5b631f74e813808c1.
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Figure 2. Fixed 30-Year Mortgage Interest Rates
July 2006 to October 2009
7.0%
6.5%
te
6.0%
t Ra
s
re
te
n
5.5%
I
ge
Orginal Tax Credit Enacted
rtga
5.0%
o
M
Modified/Enhanced Tax Credit
4.5%
4.0%
6
7
07
8
8
9
9
, 200
200
, 20
200
, 200
200
Jul
Jan,
Jul
Jan,
Jul
Jan,
Jul, 200
Source: Primary Mortgage Market Survey data provided by Freddie Mac and downloaded from Federal Reserve
Bank of St. Louis: http://research.stlouisfed.org/fred2/series/MORTG.
Moving Forward
It is important to emphasize that, moving forward, recent improvements could be reversed if the
foreclosure rate continues to rise. The issue of foreclosures has been well documented and has
received attention from policy makers since the housing market began to show signs of
weakening. Originally, the problem was concentrated among subprime borrowers who, for a
variety of reasons, were more susceptible to foreclosure when the housing market began to
deteriorate. The concern now is that the foreclosure rate among prime borrowers also appears to
be rising. Prime borrowers tended to face more scrutiny from lenders or were perceived to be less
risky, which may explain why they were better able to weather the initial downturn in housing.
But since home prices continued to fall and unemployment began to rise in late 2007, the
foreclosure rate among prime borrowers, and to a lesser degree FHA borrowers, has trended
upward.
Elevated unemployment, as is the case in late 2009, could also stunt a recovery in housing. Today,
an unemployment rate of around 5.0% to 6.0% is considered consistent with a strong economy
and a well functioning labor market.19 In October 2009 the unemployment rate was 10.2%, and
has risen every quarter since the fourth quarter of 2006.20 Among potential homebuyers, the
unemployment rate in the third quarter of 2009 was the highest for the group most likely to
represent first-time buyers (those ages 25-34) at 10.3%. 21 If unemployment remains elevated,
home buying activity may diminish as concern grows over the ability to make mortgage
payments. In addition, elevated unemployment could cause the foreclosure rate to continue to
19 For a discussion of the natural rate of unemployment, see CRS Report RL32274, A Changing Natural Rate of
Unemployment: Policy Issues, by Marc Labonte.
20 U.S. Bureau of Labor Statistics: http://www.bls.gov/news.release/empsit.nr0.htm.
21 U.S. Bureau of Labor Statistics: ftp://ftp.bls.gov/pub/suppl/empsit.cpseed8.txt.
Congressional Research Service
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An Economic Analysis of the Homebuyer Tax Credit
rise, increasing the supply of homes on the market and putting downward pressure on home
prices.
Economic Analysis
The previous section presented evidence that suggests home prices and the home inventory are, at
least temporarily, beginning to stabilize. Given the close proximity of these improvements to
when the first-time homebuyer tax credit was enacted and modified one may be tempted to
conclude that the tax credit was the cause of the housing market improving. A correlation,
however, does not imply causation. Around the same time that the homebuyer tax credit was
enacted, home prices were falling and mortgage rates were approaching recent historic lows,
which may have led more homebuyers to enter the market.
This section analyzes the homebuyer tax credit. It begins by estimating the effects that home
prices and mortgage rates had on the mortgage payment of a typical buyer, and comparing them
to the effects of the HERA (original) and ARRA (second) versions of the tax credit. The results
suggest that home prices, and to a lesser degree mortgage rates, may have been quantitatively
more important in reducing the cost of becoming a homeowner than the first-time homebuyer tax
credit. Next, estimates of the number of additional first-time purchases that can be attributed to
the ARRA and WHBAA versions of tax credit are then presented and compared to private
industry estimates. The estimates presented here raise questions about those reported by industry
analysts and the role of the tax credit in stabilizing the housing market. The analysis concludes by
examining how effective the extended first-time homebuyer tax credit and new repeat buyer tax
credit may be at providing continued support to the housing market.
Home Prices, Mortgage Rates, and the HERA and ARRA
Homebuyer Tax Credits
To quantify the potential effect of the HERA and ARRA versions of the first-time homebuyer tax
credit and compare it to the effect of falling prices and mortgage rates, an estimate was made of
how much each reduced the typical buyer’s mortgage payment. This was accomplished by first
estimating the mortgage payment for a median priced home at the peak of the housing market
assuming a 30-year fixed rate mortgage.22 The mortgage payment was then recomputed three
times after accounting for the fall in home prices (price effect); the fall in mortgage rates
(mortgage rate effect); and the homebuyer tax credit (tax credit effect). The effect of each factor
was then measured as the difference between the mortgage payment at the peak of the housing
market and the mortgage payment after each factor changed.
Several assumptions were made to carryout the estimation. The first assumption relates to the
peak of the housing market. As Figure 1 shows, the two most popular measures of home prices,
the Case-Shiller and FHFA indices, disagree as to exactly when this occurred. The Case-Shiller
index peaked in May 2006, while the OFHEO index peaked in April 2007. In additional, regional
markets tended to peak at different times. As a compromise, the peak of the housing market was
chosen as January 2007. The median existing home sales price ($210,600) was then chosen as the
22 For simplicity the mortgage payment was based on the assumption of no down payment, insurance, taxes, etc.
Congressional Research Service
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An Economic Analysis of the Homebuyer Tax Credit
median home price at the peak of the housing market, and the mortgage rate was assumed to be
the rate that prevailed at the time.23
The next assumption concerns the decrease in home prices. Since the Case-Shiller and the FHFA
indices provide different estimates, the decrease in home prices was calculated three times using:
the Case-Shiller index; the FHFA index; and the average of the two. Each time, the percentage
decrease in the index was used to compute how much the median home price fell from the peak
of the market to when the tax credit was enacted. Lastly, the tax credit was assumed to effectively
lower the purchase price of a home. For the $8,000 ARRA tax credit which was available to 2009
homebuyers this is straightforward. But the original $7,500 tax credit available in 2008 must be
repaid, which lowers its effect on a home’s purchase price. After accounting for repayment, the
$7,500 tax credit was estimated to have a reduced a home’s purchase price by $2,104 or 1.0%.24
Table 2 presents the estimation results separately for the $7,500 HERA tax credit for 2008
homebuyers and the $8,000 ARRA tax credit for 2009 homebuyers. Consider the results for the
2008 tax credit first (top half of table). At the peak of the housing market, a potential buyer of a
median price home would have been required to make a monthly mortgage payment of $1,293.
Between the peak of the housing market and when the tax credit was enacted, home price
decreased from $210,600 to $187,595, or an average of 11%. The column labeled “Price Effect”
shows that this decrease in home prices is estimated to have reduced a potential buyer’s mortgage
payment by $141 a month, or $1,694 annually. Over the same time period, mortgage interest rates
actually increased slightly from 6.22% to 6.43%. The column labeled “Mortgage Rate Effect”
indicates that this rise in mortgage rates increased a buyer’s monthly mortgage payment by an
estimated $29 and annual monthly payment by $346.
The top half of Table 2 also shows that the HERA homebuyer tax credit is estimated to have
reduced a typical first-time homebuyer’s mortgage payment by about $13 a month or $156
annually. To understand the impact of the $7,500 tax credit, consider that the reduction in a
typical buyer’s mortgage payment that can be attributed to the credit is less than 1/10th the
reduction that can be attributed to falling home prices. That is, the benefit to potential home
buyers from falling home prices was more than ten times the benefit received from the tax credit.
The last column of Table 2 shows that the total effect of home prices, mortgage rates, and the
2008 tax credit resulted in the typical homebuyer’s mortgage payment falling $129 a month or
$1,544 a year compared to the peak of the housing market.
The bottom half of Table 2 reports the estimation results for the ARRA version of the homebuyer
tax credit. By the time the ARRA tax credit became available in February 2009 home prices had
fallen an average of 19% from the peak of the market. The home price decline alone is estimated
to have decreased a typical homebuyer’s monthly mortgage payment by $247 and annual
mortgage payment by $2,970. The decrease in mortgage rates that began in mid-2008 and
continued until after the 2009 credit was enacted is estimated to have reduced the median
mortgage payment by $145 a month or $1,743 annually.
23 Regional median home prices may vary substantially.
24 The effective value of the $7,500 repayable tax credit was computed as the present value of the tax credit under the
assumption that a buyer remains in their home for six years (the average for first-time buyers) and a discount rate of
6.43% (mortgage interest rate at the time). Since their is a one year “grace” period before repayment begins, the
taxpayer would pay nothing in the first year of homeownership, $500 in years four through five, and then $5,500 in the
sixth year (moving before repayment requires the buyer to repay the remaining amount).
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An Economic Analysis of the Homebuyer Tax Credit
Due to the removal of the repayment requirement and the increased credit amount, the ARRA
version of the homebuyer tax credit had a larger effect on the cost of owning a home than the
HERA version of the credit. Specifically, Table 2 presents estimates that suggest the ARRA tax
credit reduced the median monthly mortgage payment by $49 and the annual mortgage payment
by $589. The results imply that the ARRA tax credit had about 1/5th the impact that falling home
prices did, and 1/3rd the effect of lower mortgage rates. Combined, home prices and mortgages
rates were estimated to be eight times more powerful at lowering the cost of homeownership than
the tax credit.
That low home prices, together with low mortgage rates, appear to have provided the largest
incentive to purchase a home is important. Unlike the tax credit, which only benefited first-time
buyers, lower prices and mortgages rates benefited all buyers (first-time and repeat). As a result,
lower home prices and mortgage rates may have played a larger role in stabilizing the housing
market than the tax credit since the incentive that they provided was larger and more wide-spread
than the incentive provided by the homebuyer tax credit.
At the same time, the price effects reported in Table 2 may understate the influence falling prices
had in some markets. The results reported above were based on the average change in home
prices as computed from the average of the Case-Shiller and FHFA price indices. But the Case-
Shiller index, which captures price changes in some of the larger bubble-prone markets, fell an
average of 18% and 29%, respectively, leading up to the tax credit’s enactment and modification.
Prices in some harder hit markets such as Las Vegas, Miami, Phoenix, San Diego, and San
Francisco fell by as much as 30% prior to the tax credit, and by as much as 50% prior to its
modification. Estimating the effect of falling home prices for these markets, which is presumably
larger than the analysis above, would greatly reduce the relative effect of the tax credit effect.
Along the same lines, the price effects reported in Table 2 may overstate the influence falling
prices had in some markets. There are smaller housing markets, particularly in the Midwest,
where the decline in home prices was relatively small when compared to some larger “bubble”
markets. In addition, before the housing crisis, home prices in these markets were usually lower
than the national average. As a result, the effect of falling home prices may have been smaller
than the effect of the tax credit in some areas of the country.
Understanding regional difference in falling prices is important to understanding the effectiveness
of the homebuyer tax credit. Markets that had the largest home inventories also experienced some
of the largest declines in prices. And it was the decline in home prices that appears to be what
may have provided the majority of the incentive to purchase a home. So in markets that were
hardest hit by the housing downturn the homebuyer tax credit may have had a minor effect when
compared to the effect of lower home prices.
Congressional Research Service
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Table 2. Estimated Reduction In Mortgage Payment from Home Prices, Mortgage Rates, and the Homebuyer Tax Credit
Mortgage Rate
2008 HERA Tax Credit
Median Home
Price Effect
Effect
Tax Credit Effect
($7,500 repayable)
Price
Average (-11%)
(6.22% to 6.43%)
($7,500) Total
Effect
Home Price
$210,600
$187,595 $210,600 $208,496 $185,491
Monthly Mortgage Payment
$1,293 $1,151 $1,321 $1,280 $1,164
Reduction in Monthly Payment
$141 -$29 $13 $129
Reduction in Annual Payment
$1,694 -$346 $155 $1,544
Median Home
Mortgage Rate
2009 ARRA Tax Credit
Price
Price Effect
Effect
Tax Credit Effect
($8,000 non-repayable)
(January 2007)
Average (-19%)
(6.22% to 5.15%)
($8,000) Total
Effect
Home Price
$210,600
$170,280 $210,600 $202,600 $162,280
Monthly Mortgage Payment
$1,293 $1,045 $1,147 $1,243
$884
Reduction in Monthly Payment
$247 $145 $49 $409
Reduction in Annual Payment
$2,970 $1,743 $589 $4,902
Source: CRS calculations.
Notes: The total reduction in the mortgage payment is not the simple sum of the Price, Interest, and Tax Credit Effects because the relationship between the interest rate
and mortgage payment is non-linear.
CRS-13
An Economic Analysis of the Homebuyer Tax Credit
In addition, the estimates presented in Table 2 were derived using the national median purchase
price at the peak of the market, rather than when the tax credit was enacted or modified. Table
D-1 in Appendix D reports the estimates assuming the median purchase price at the time the tax
credit was modified in February 2009. The dollar amounts are essentially the same and the effects
of home prices and mortgage rates relative to the tax credit are also quite close to the results
presented in Table 2.
Estimates of Home Purchases Attributable to the ARRA and
WHBAA Homebuyer Tax Credits
It is possible to estimate how many additional home sales may be attributable to the tax credit
given a measure of how responsive home purchases are to price changes.25 Recall that the tax
credit effectively lowers the purchase price of a home. Generally, economists measure how
sensitive consumers are to price changes by using a “price elasticity.” Price elasticity is defined as
the percent change in a quantity purchased, in this case homes, in response to a given percent
price change. Estimates for the price elasticity of home purchases vary but generally fall in the
-0.5 to -1.0 range.26 This range implies that the number of home purchases increases between
0.5% to 1.0% for every 1.0% decrease in home prices. Combining home purchase data with
estimates of price elasticity allows for the number of additional home sales attributable to the tax
credit to be computed.
The top half of Table 3 reports the CRS estimated number of additional home purchases that
could be expected to be attributable to the ARRA and WHBAA versions of the tax credit. The
estimates should be interpreted as the number of additional home purchases that the tax credit
could have originally been expected to elicit at the time of enactment if the credit was left
unaltered until it expired. This approach allows for a comparison to estimates made by industry
analysts around the time the ARRA and WHBAA versions of the credit were being debated.
Because estimates of the price elasticity vary, three different values were used; -0.5, -1.0, and -
1.5. The last price elasticity was included because a buyer’s response to a temporary tax credit
may be higher than a typical price change. Depending on the assumed responsiveness of buyers to
price changes, it was estimated that the ARRA tax credit could have been expected to result in
between 42,790 and 128,371 additional home purchases, while it was estimated that the WHBAA
tax credit could be expected to result in between 51,523 and 153,760 additional purchases. 27
25 The qualifier “additional” is used to distinguish purchases attributable to the tax credit from those that would have
occurred anyway.
26 Harvey S. Rosen, “Housing Subsidies: Effects on Housing Decisions, Efficiency, and Equity,” National Bureau of
Economic Research, Working Paper 1161 (June 1983), and Todd Sinai, “Urban Housing Demand,” in The New
Palgrave Dictionary of Economics, ed. Steven N. Durlauf and Lawrence E. Blume , 2nd ed. (Palgrave Macmillan,
2008).
27 See Appendix E for a summary of the data and calculations used to derived these estimates.
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An Economic Analysis of the Homebuyer Tax Credit
Table 3. Estimated Additional Home Purchases Attributable to the ARRA and
WHBAA Versions of the Homebuyer Tax Credit At Time of Enactment
Estimated Additional Home Purchases
CRS Assumption of Price
ARRA First-Time Homebuyer
WHBAA First-Time and Repeat
Elasticity
Tax Credit
Homebuyer Tax Credit
-0.5 42,790 51,253
-1.0 85,581 102,507
-1.5 128,371 153,760
ARRA First-Time Homebuyer
WHBAA First-Time and Repeat
Private Industry Analyst
Tax Credit
Homebuyer Tax Credit
NAHB 200,000 180,000
NAR 350,000 N/A
Moody’s
400,000 N/A
Source: CRS calculations, in addition to data obtained from:NAHB, http://www.nahb.org/news_details.aspx?
newsID=9809 and http://www.nahb.org/news_details.aspx?sectionID=148&newsID=10029; NAR,
http://www.realtor.org/press_room/news_releases/2009/09/record_roll; and Moody’s, http://blogs.wsj.com/
economics/2009/09/08/home-buyer-tax-credit-added-400000-sales-zandi-says/.
The bottom half of Table 3 reports estimates by private industry analysts of the number of
additional home purchases that each version of the tax credit was originally expected to generate.
Only the NAHB provided a publicly available estimate of the WHBAA version of the credit. It is
immediately apparent that private industry analysts’ estimates are higher than those reported in
the top half of the table. One explanation, which is important for the estimates of ARRA first-time
homebuyer tax credit, is that industry estimates likely attempt to account for a “trade-up” effect;
existing homeowners, who were not eligible for the first-time buyer tax credit, moving up in the
market due to the increased demand for their own entry-level homes. But still, the estimates
appear to be assuming either a rather large trade-up effect, or that buyers are particularly sensitive
to price changes, or both. In the end, however, it is difficult to understand exactly how industry
analysts arrived at their estimates. Information about assumptions, data, and the exact
methodology used are unknown.28
The additional purchases generated by the credit should have had a significant impact on the
inventory of unsold homes if the tax credit had been a driving force in the stabilization of home
prices. When ARRA enhanced the homebuyer tax credit by removing the repayment requirement
and increasing the credit amount to $8,000 the total home inventory (new and existing) was at a
9.7 months supply.29 The industry estimates reported in Table 3 imply that the ARRA version of
28 The NAHB has released a report that partially explains how they may be estimating the effect of the 2009 homebuyer
tax credit. The report suggests that they are assuming an elasticity of -1.0, however, the report lacks important details
that prevent reproduction of the results. Likewise, neither NAR or Moody’s has provided a description of their
methodologies, and hence, their estimates can not be reproduced directly either. The NAHB’s report may be found at
http://www.nahb.org/generic.aspx?sectionID=734&genericContentID=104893&channelID=311.
29 Table 1 shows that the existing home inventory was 9.7 months, while the new home inventory was 11.1 months.
The new home inventory was so small relative to the existing inventory that the total inventory was largely determined
by the existing home inventory.
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An Economic Analysis of the Homebuyer Tax Credit
the homebuyer tax credit could have been expected to reduce the total home inventory from a 9.7
months supply to between an 8.9 to 9.3 months supply, or by 4% to 8%. One could question how
big an impact a 4% to 8% reduction in the home inventory may have had on stabilizing the
housing market given that the inventory was at times more than double what is considered
normal. It could also be argued that the tax credit’s impact on the home inventory may have been
even smaller if the estimates made by industry analysts about the number of additional purchases
are believed to be too generous.
The number of additional home purchases attributable to either version of the tax credit may be
significantly less than those attributable to lower home prices and mortgage rates. Recall that the
previous section estimated that the combined effect of falling home prices and mortgage rates on
a typical buyer’s mortgage payment was around eight times that of the ARRA version of the
homebuyer tax credit. In addition, lower home prices and mortgage rates benefited homebuyers
across the board (repeat and first-time) as opposed to just first-time buyers. Thus, the
improvements in the housing market (stabilized home prices and falling inventory) that occurred
around the time of the HERA and ARRA versions of the credit may have been more the result of
lower home prices and mortgage interest rates.
Continued Housing Market Support and the WHBAA Homebuyer
Tax Credit
Two common rationales that have been offered for the extended and expanded WHBAA version
of the tax credit are that it will continue to support the housing market and may also have a
stimulative effect on the broader economy. This section focuses exclusively on analyzing the
credit as a tool for supporting the housing market moving forward. The wide range of policy tools
and options for stimulating the economy place such an analysis beyond the scope of this report.
The expansion of the tax credit to repeat buyers allows the credit to be taken advantage of by a
larger pool of potential homebuyers, and may increase the credit’s ability to stimulate aggregate
home buying. As a result, the modified homebuyer credit may increase the rate at which the home
inventory is drawn down, leading the housing market to fully stabilize sooner rather than later.
The stimulative effect of the tax credit would likely be greatest if the modifications are viewed as
temporary. If potential buyers come to expect that the credit will be available in the future then
the incentive to purchase a home now is reduced. In addition, the temporary nature of the tax
credit reduces the potential that its value is built into home prices as sellers respond by raising
prices.
The simulative effect on home buying activity from expanding the credit to repeat buyers,
however, may be limited. Repeat buyers typically purchase higher priced homes than first-time
buyers. But the incentive provided by the tax credit to purchase a home falls as home prices
increase. The tax credit amount is also reduced for repeat buyers, which may limit the potential of
the credit to stimulate home buying further. For example, the $8,000 first-time homebuyer tax
credit reduces the purchase price of a $200,000 by 4.0%, while the $6,500 repeat buyers tax credit
only reduces the purchase price of a $400,000 house by 1.6%. In addition, to take a advantage of
the tax credit a repeat buyer will typically have to sell a home, which will often require paying a
real estate agen and incurring other costs, possibly reducing the credit’s incentive more. As a
result, extending the tax credit to repeat buyers may increase the likelihood that the credit is
simply claimed by those that would have purchased a home regardless. This may be particularly
Congressional Research Service
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An Economic Analysis of the Homebuyer Tax Credit
true if it is believed that the overriding determinants of home buying activity are currently low
home prices and mortgage rates.
The tax credit may also be of limited use if conditions in the housing market begin to deteriorate.
One of the biggest threats to the housing market moving forward is rising foreclosure rates,
which, at this point in the housing downturn, are being driving primarily by rising unemployment.
And although the tax credit has been expanded to repeat homebuyers partly to address
foreclosures in the mid- to high-priced markets, the tax credit has little direct effect on the
employment status of unemployed homeowners. As a result, the tax credit may not be effective at
preventing foreclosure rates from rising. The expanded tax credit, however, may reduce the time
foreclosed homes remain on the market. At the same time, lower home prices may still be the
primary determinant for a potential buyer.
Congressional Research Service
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An Economic Analysis of the Homebuyer Tax Credit
Appendix A. Tax Credits Claimed On A State-by-
State Basis
Table A-1. First-Time Homebuyer Tax Credits Claimed By State
(includes 2008 and 2009 tax credit claims)
State
Number of
Percent of
Amount of
Percent of Total Amount
Credits Claimed
Total
Credits Claimed
Claimed
Alabama 25,302
1.78%
$177,295,315.44
1.78%
Alaska 3,126
0.22%
$21,545,975.59
0.22%
Arizona 38,121
2.68%
$275,350,149.40
2.76%
Arkansas 14,664
1.03%
$99,851,701.98
1.00%
California 160,325
11.26%
$1,147,477,744.15
11.50%
Colorado 27,165
1.91%
$193,491,734.66
1.94%
Connecticut 12,211
0.86%
$84,853,591.28
0.85%
Delaware 3,893
0.27%
$27,450,093.28
0.28%
District of Columbia
1,329
0.09%
$9,059,596.92
0.09%
Florida 105,608
7.42%
$768,065,936.94
7.70%
Georgia 55,790
3.92%
$397,876,065.02
3.99%
Hawai 3,150
0.22%
$21,935,330.84
0.22%
Idaho 8,543
0.60%
$62,085,787.02
0.62%
Illinois 51,600 3.62%
$355,892,454.23
3.57%
Indiana 30,888
2.17%
$209,366,566.47
2.10%
Iowa 16,559
1.16%
$111,436,693.36
1.12%
Kansas 13,789
0.97%
$93,832,540.07
0.94%
Kentucky 19,184
1.35%
$132,404,006.84
1.33%
Louisiana 21,733
1.53%
$149,875,454.73
1.50%
Maine 5,061
0.36%
$34,711,786.83
0.35%
Maryland 23,679
1.66%
$164,928,641.43
1.65%
Massachusetts 25,029
1.76%
$171,707,227.09 1.72%
Michigan 55,066
3.87%
$361,953,001.54
3.63%
Minnesota 28,758
2.02%
$199,985,799.29
2.00%
Mississippi 15,152
1.06%
$104,279,285.08
1.05%
Missouri 30,072
2.11%
$207,502,200.17
2.08%
Montana 4,257
0.30%
$29,513,100.13
0.30%
Nebraska 10,167
0.71%
$71,000,370.19
0.71%
Nevada 20,222
1.42%
$146,661,682.78
1.47%
New Hampshire
5,149
0.36%
$35,431,775.87
0.36%
New Jersey
30,366
2.13%
$208,252,417.60
2.09%
Congressional Research Service
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An Economic Analysis of the Homebuyer Tax Credit
Number of
Percent of
Amount of
Percent of Total Amount
State
Credits Claimed
Total
Credits Claimed
Claimed
New Mexico
7,281
0.51%
$51,537,496.21
0.52%
New York
50,380
3.54%
$339,170,763.02
3.40%
North
Carolina 44,847
3.15%
$320,459,722.19 3.21%
North Dakota
2,654
0.19%
$17,779,366.06
0.18%
Ohio 48,671
3.42%
$325,696,178.43
3.27%
Oklahoma 19,570
1.37%
$133,428,216.02
1.34%
Oregon 14,182
1.00%
$100,461,868.56
1.01%
Pennsylvania 53,508
3.76%
$366,222,719.01
3.67%
Rhode Island
4,165
0.29%
$29,537,675.15
0.30%
South Carolina
21,957
1.54%
$154,507,294.13
1.55%
South Dakota
3,330
0.23%
$22,551,737.29
0.23%
Tennessee 35,892
2.52%
$256,422,528.49
2.57%
Texas 131,411
9.23%
$931,046,064.09
9.33%
Utah 17,534
1.23%
$129,356,648.40
1.30%
Vermont 2,097
0.15%
$14,157,937.93
0.14%
Virginia 40,527
2.85%
$286,986,383.51
2.88%
Washington 26,568
1.87%
$189,005,492.70
1.89%
West Virginia
5,563
0.39%
$36,380,376.18
0.36%
Wisconsin 24,649
1.73%
$170,765,960.35
1.71%
Wyoming 2,807
0.20%
$19,666,599.99
0.20%
Other 661
0.05%
$4,708,574.64
0.05%
Total
1,424,212
100.00%
$9,974,923,628.57
100.00%
Source: Internal Revenue Service.
Notes: Figures report tax credits claimed for 2008 and 2009 purchases as of 8/24/2009.
Congressional Research Service
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Appendix B. Regional Home Prices
Figure B-1. S&P Case-Shiller Regional Home Price Indices
January 2000 to July 2009
300
Miami
250
Phoenix
200
Las Vegas
D.C.
x
Seattle
150
Inde
Cleveland
100
Detroit
50
0
00
1
2
03
9
004
05
08
, 20
, 20
, 2
20
20
n,
n,
Jan
Jan, 200
Jan, 200
Jan
Jan
Ja
Jan, 2006
Jan, 2007
Ja
Jan, 200
Source: Standard and Poor’s, http://www2.standardandpoors.com/spf/pdf/index/SA_CSHomePrice_History_092955.xls.
CRS-20
Appendix C. Home Prices By Price Tier
Figure C-1. S&P Case-Shiller Regional Home Price Indices by Price Tier
January 2000 to July 2009
Source: Standard and Poor’s, http://www2.standardandpoors.com/spf/pdf/index/SA_cs_tieredprices_092955.xls.
CRS-21
Appendix D. Estimated Reduction In Mortgage Payment Assuming Lower
Initial Price
Table D-1. Estimated Reduction In Mortgage Payment from Home Prices, Mortgage Rates, and the Homebuyer Tax Credit
Median Home
Mortgage Rate
2008 HERA Tax Credit
Price
Price Effect
Effect
Tax Credit Effect
($7,500 repayable)
(Feb 2009)
Average (-11%)
(6.22% to 6.43%)
($7,500) Total
Effect:
Home Price
$168,200
$149,827 $168,200 $166,096 $147,723
Monthly Mortgage Payment
$1,032 $920 $1,055 $1,019 $9,27
Reduction in Monthly Payment
$113 -$23 $13 $105
Reduction in Annual Payment
$1,353 -$277 $155 $1,265
Median Home
Mortgage Rate
2009 ARRA Tax Credit
Price
Price Effect
Effect
Tax Credit Effect
($8,000 non-repayable)
(Feb 2009)
Average (-19%)
(6.22% to 5.15%)
($8,000)
Total Effect:
Home Price
$168,200
$135,997 $168,200 $160,200 $127,997
Monthly Mortgage Payment
$1,032
$835 $916 $983 $697
Reduction in Monthly Payment
$198 $116 $49 $335
Reduction in Annual Payment
$2,372 $1,392 $589 $4,020
Source: CRS calculations.
CRS-22
An Economic Analysis of the Homebuyer Tax Credit
Appendix E. Method for Estimating Additional
Home Purchases
This appendix outlines the assumptions, data, and methods used to estimate the number of
additional home purchases attributable to the ARRA and WHBAA homebuyer tax credits. The
first step in the estimation was to determine the number of home purchases that would have
occurred without the homebuyer tax credit. This number was then adjusted upward to account for
the increase in first-time home buying activity.
It was assumed that the number of home purchases that would have occurred absent the tax credit
was simply equal to the total number of home purchases in 2008. The NAR reports that there
were 4,913,000 existing home purchases in 2008, while the Census Bureau reports that there were
485,000 new home purchases in 2008. 30 Thus, the total number of home purchases in 2008 was
5,398,000. Historically, first-time buyers have represented about 40% of annual home purchases.
Therefore, in 2008 it was estimated that there were 2,159,200 first-time home purchases (40% ×
5,398,000), and 3,238,800 repeat home purchases.
Next, the price reduction induced by the homebuyer tax credit was calculated. The ARRA
homebuyer tax credit was enacted in February 2009. According to the NAR, the median existing
home price at this time was $168,200. This implies that the ARRA homebuyer tax credit
effectively reduced the purchase price of a home by 4.76% ($8,000/$168,200). The WHBAA
homebuyer tax credit was enacted in November 2009. Home price data had not been released at
the time this report was originally authored. Using the median home price in October ($218,000),
however, the WHBAA tax credit was estimated to reduce the purchase price for a first-time buyer
by 3.67% ($8,000/$218,000) and by 2.98% ($6,500/$218,000) for repeat buyers. Note, for
simplicity it was assumed that the median first-time and median repeat buyer purchased homes
worth identical prices
Given an assumption about how responsive buyers were to these price reductions, an estimate can
be formed about the annual increase in home purchases. A buyer’s responsiveness to price
changes is captured by the price elasticity of demand. The estimates in the body of the report
assumed a range -0.5 to -1.5 for the price elasticity of demand. The elasticity multiplied by the tax
credit induced price reduction indicates the percentage increase in home purchases that can be
attributable to the tax credit, which can then be used to adjust annual homes purchases upward.
As a result, the increase in annual first-time purchases attributable to the ARRA tax credit was
estimated to be between 51,348 and 154,045 (elasticity × -4.76% × 2,159,200). The increase in
annual first-time purchases attributable to the WHBAA tax credit was estimated to be between
39,600 and 118,801 (elasticity × -3.67% × 2,159,200), while the increase in annual repeat home
purchases attributable to the WHBAA credit was estimated to between 48,263 and 144,788
(elasticity × -3.67% × 3,238,800). Thus, the WHBAA tax credit was estimated to result in 87,863
to 263,589 additional home purchases.
Lastly, these annual increases in home purchases were adjusted for the fact that the tax credits
were or are not available for a full year. The ARRA tax credit was enacted in February and was
30 Census: http://www.census.gov/const/quarterly_sales.pdf; NAR: http://www.realtor.org/wps/wcm/connect/
d543f080400816579965fd205f470b6e/REL0909EHS.pdf?MOD=AJPERES&CACHEID=
d543f080400816579965fd205f470b6e
Congressional Research Service
23
An Economic Analysis of the Homebuyer Tax Credit
set to expire December 1, 2009. So the annual increase in first-time purchases attributable to the
ARRA tax credit was multiplied by 10/12. Likewise, the WHBAA tax credit was enacted in
November 2009 and is set to expire July 1, 2010. Thus, the annual increase in home purchases
attributable to the WHBAA tax credit was multiplied by 7/12. Doing so produces the results
reported in Table 3.
Author Contact Information
Mark P. Keightley
Analyst in Public Finance
mkeightley@crs.loc.gov, 7-1049
Congressional Research Service
24