Was the First-Time Homebuyer Credit Good Policy?

Narrator: During the Great Recession, the US government approved programs that might otherwise never have gotten off the legislative ground. These programs turned policy makers into experimenters, testing different approaches to spurring recovery. And now that the economy has stabilized, researchers can look back at the government’s various interventions to find out what worked and what didn’t. 

Consider the First-Time Homebuyer Credit, or FTHC. It was a temporary program that gave first-time buyers interest-free loans of up to $7,500 and, in later versions of the program, refundable tax credits of up to $8,000. The goal of the program was to spur demand in the stagnated housing market. 

So did it work? That’s one of the questions that David Berger from Northwestern University, Nicholas Turner from the US Office of Tax Analysis, and Chicago Booth’s Eric Zwick tried to answer in a new study. According to them, the answer is yes—and no, depending on how you look at it.

Eric Zwick: There are two ways to think about this kind of a program and what effect it had. One is a traditional question: How much GDP did this cause? How much additional output did the program create? The second is to think about: Are there other market failures or inefficiencies in the economy that the program addressed?

Narrator: If you look only at that first question, namely how this program contributed to GDP, the FTHC was not very successful because it focused on homes that had already been built. The only direct effects on GDP came from things like realtor fees, lawyer fees, and furniture purchases.

Eric Zwick: Most of the home has already been delivered in the past. Most of the output has already been produced. So the program was, sort of, maybe demand management in this view. But also because existing home sales benefited, it can’t just be thought of that way.

Narrator: So focusing on GDP is only part of the story. Another way to evaluate the FTHC is to look at what market problems it addressed. One such problem is called the foreclosure externality. It’s common knowledge among homeowners that a foreclosed or vacant home on the street will bring down the value of the surrounding homes.

Eric Zwick: And the private market’s not very good at solving this problem, which I think is intuitive. It’s hard to get your neighbor, if there’s no neighbor there, to cut the lawn, even though that affects you.

Narrator: During the recession there was a huge surplus of these vacant and underused homes, as well as a lack of qualified buyers, so the effects that the foreclosure externality has during normal times was amplified. The FTHC helped mitigate that problem.

Eric Zwick: We present a host of evidence suggesting that the program promoted beneficial reallocation from low-value sellers to high-value buyers—specifically, homes that were vacant or underused moved into the hands of people who actually planned to live there and benefit, and we saw that house prices in these areas stabilized, which suggests that the housing-market health improved.

Narrator: So the benefits of sales induced by the FTHC spilled over into the values of homes in the surrounding neighborhoods. 

Another effect of the FTHC was to relax financial constraints at a time when private lenders could not help the people who wanted to buy homes.

Eric Zwick: We see lot of evidence that suggest that the buyers who responded most to the program were in fact buyers that were quite credit-constrained, because they took up a federally subsidized loan program, which required only 3.5 percent down payments but came with considerably higher mortgage-insurance costs.

Narrator: These effects might seem slight at first, but they do add up. The researchers estimate that aggregate home sales would have been 7–14 percent lower without the FTHC. And that effect did not immediately reverse after the policy expired—in part because the people who claimed the credit might otherwise have waited several years to buy a home, if they bought one at all. 

Altogether, the researchers’ findings suggest that the First-Time Homebuyer Credit did help to stabilize and stimulate the housing market. And they mean that similar interventions in the future will be a little less experimental and, hopefully, even more effective.