The $8,000 tax credit for first-time home buyers is going to expire on November 30th. People have to close by that date, which means they really have to agree to buy within the next few weeks.

The housing market has begun to rebound a bit, and the tax credit has been part of it. So should Congress extend, or even — as some are advocating — expand the program? My answer would be no, certainly no to expansion.

Conceptually, the tax credit is similar in many ways to the “Cash for Clunkers” program, but it is much more expensive, and far less targeted. “Cash for Castles” applies to any house, either new or used, while “Cash for Clunkers” only applied to new cars.

Increasing sales of used houses only indirectly stimulates the economy. The same is true for used car sales. With sales of used homes, very few jobs are created, other than for used-home salespeople (a.k.a. realtors). True, there is some indirect stimulus, as people are prone to buy new furniture and paint when they move into a new (for them) house. Still, the benefits to the economy are small compared to new home sales.

So far, about 1.5 million people have taken advantage of the Cash for Castles program, which means that we have spent about $12 billion on it, or four times the amount spent on the Cash for Clunkers program. The Clunkers program directly resulted in companies like Ford (F), Toyota (TM) and suppliers like TRW Automotive (TRW) calling people back to work.

It also probably resulted in lower losses at GM, where we the taxpayers are big shareholders. Dollar for dollar, Cash for Clunkers was a far more successful stimulus program.

The big question is how many of those 1.5 million people would have bought a home anyway. It is almost impossible to tell, but I suspect that about 80% or 1.2 million would have. Thus on an incremental basis, the government is spending about $40,000 per extra house sold. While the same argument could be made about the Cash for Clunkers program, that program also had the very important ancillary benefit of taking old gas guzzlers off the road and modernizing the nation’s auto fleet.

Over the next three years, the Clunkers program should save the nation about 700 million gallons of gasoline.  Since we import about 70% of our oil, that will put a dent into our trade deficit going forward, not to mention the lower carbon foot print. New cars are generally safer as well, so the program will probably result in lower highway fatalities, for good measure. Cash for Castles does nothing remotely as beneficial.

One also has to ask a normative question. Is it fair? Public policy is still hostile towards people who rent. You can deduct the interest on your mortgage without limit, and the more you make, the more valuable that tax deduction is.

Someone who owns a house with a mortgage interest part of $1000 and is in the 15% tax bracket gets a $150 a month housing subsidy from Uncle Sam. Someone who is making $250,000 a year and lives in a McMansion with a $3000 a month interest component to their mortgage would get a $1,050 monthly subsidy. There is no rent subsidy (unless you are very poor and are in Section 8 housing).

As a group, renters have much lower incomes than do homeowners, and also tend to have less assets. Renters subsidize the housing of homeowners. Now this program adds yet more subsidies to homeowners. If it is extended, or even worse expanded to include all homebuyers rather than “first time” buyers, it has all the earmarks of the sort of program that will never go away.

There are some benefits to homeownership to the society at large (positive externalities). Homeowners tend to take care of their properties better than renters do. There are also some negative externalities. For starters, it makes the workforce less mobile. People who have to sell a house to take a new job in a different state are far less likely to do so than people who simply have to break a one-year lease. This is particularly true since the transaction costs in buying and selling real estate are very high — traditionally, about 6% just for realtors fees.

Even if the program were targeted at just new homes rather than used homes, it is hard to argue that there is a big housing shortage in the country. Yes, Residential Investment is a big part of (or at least used to be) overall investment in the economy. It is, however, a very low return type of investment.

Putting that money into repairing our neglected infrastructure would create far more jobs, and have a much higher long-term return on investment than simply cutting checks to people who probably would have bought houses anyway.
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