CRS_tax_credit.pdf

It’s hard to turn on a newscast these days without hearing about the Cash for Clunkers program and what it has done for the auto industry.

It’s also hard to resist the urge to make comparisons between Washington’s two great fixes to stimulate the economy: C4C and the first-time homebuyers’ tax credit. If you’re thiniking that the real estate industry needs a Cash for Clunkers program, you might match up of the two fixes to see if it makes sense.

First, a caveat. Comparing stimulus programs designed for two very different industries is like comparing cures for two different diseases. In fact, the forces that brought both industries to their knees are quite different. International competition, high labor costs, questionable management decisions and restrictive credit brought down autos. Housing suffered from questionable lending practices, six years of an overabundance of credit and now is being strangled by record foreclosures and oversupply.

Both industries, however, share marquee roles in keeping the national economy healthy. They employ millions, drive big chunks of the Gross Domestic Product and are critical to the national economy. Both also face a similar daunting task: to convince consumers struggling through the worst recession they will see in their lives that despite unemployment setting records every month this is the ideal time to add a big new expense to the monthly budget and purchase one of the two most expensive items they will make in their lives-a home or a new car.

Both programs involve applying billions of taxpayer dollars to prime the pump. They were created in Washington by lobbyists, politicians, government officials in an atmosphere tinged with crisis by a process that rewards compromise over creativity and launched with a great deal of hope but no real certainty that they would work.

While it’s too early to declare success or failure for either program, first returns tell us a lot.

Last week, Cash for Clunkers sold some 250,000 cars at a cost of $1 billion in rebates ranging from $3500 to $4500. Ford said yesterday that US sales rose 2.3 percent last month, the first year-over-year increase for any of the six largest carmakers since last August. GM and Chrysler also reported improved sales in July.

“I challenge anyone to show me a one-week program that has had as much benefit to the consumer and as much impact on the environment as this one has,” George Pipas, Ford’s chief sales analyst, told the New York Times.

But the goal of C4C was not a one-week pop in sales. It was created to ignite a lasting recovery. Auto inventories have dropped to healthy levels and some manufacturers are ramping up production. Now that rebates have run out will buyers continue to kick tires in show rooms or will they stay home, forcing inventories back up and another round of auto lay offs?

For the first-time home buyer tax credit, first returns are mixed. It was created to reduce the supply of homes on the market and stabilize home prices by stimulating home buying. Builders, Realtors and lenders are wildly in favor of it, especially the current version, which has been substantially improved over the credit passed by Congress a year ago. Unlike the 2008 credit, first-timers who buy this year don’t have to repay the credit before they sell and they can use a portion of it to pay some closing costs. In February, Congress also sweetened the credit by $500. A campaign is underway to increase it and make it available to all buyers, not just first-timers.

Recovery remains a goal rather than a reality in most real estate markets. Home sales have increased slightly over a year ago, before the first version of the credit took effect and the months’ supply has fallen below 10 months; a year ago it was at 11. Whether prices have stabilized depends on where you live and which indicators you believe.

Final data is not available on the 2008 credit, but according to very preliminary figures from the IRS, buyers are making good use of it. Some 567,685 taxpayers claimed more than $3.9 billion worth of first-time homebuyer credits on their 2008 tax returns. Even though 38,158 may be disqualified because the IRS has found they had ownership in a personal residence within the past three years, the total would exceed the $4.6 billion estimated by Congress last year. These preliminary figures were from returns received in March, five weeks before 2008 returns were due.

The real test of the credit will be whether it motivates consumers to buy now rather than remain on the sidelines. Findings by a survey of potential buyers in June suggested the program was falling short. The national survey by GfK Custom Research found, that as a motivator to get buyers to buy now, the tax credit ranked behind taking advantage of foreclosure opportunities, locking low rates and taking advantage of low prices before they rise.

Finally there is the question of the credit’s size and impact. It amounts to less than five percent of the purchase price of the median existing home today and far, far less than the cost of consumers pay to finance a home over 30 years. By contrast, the C4C rebate is about 20 percent of the average price of a new car. An analysis by the Congressional Research Service in February (see file above) concluded that, “The first-time homebuyer tax credit could be expected to increase the probability that the average household purchases a home in 2009 by at most 5.68 percentage points.”

Match-up of the Fixes:

Cash for Clunkers vs. Homebuyer Tax Credit