A $15,000 gift for homebuyers?

The U.S. Senate approves an amendment to the economic stimulus package that would provide a tax credit of up to $15,000 for homebuyers who purchase a primary residence in the coming year. But economists are skeptical tax credits will prove stimulative.
By The Wall Street Journal
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Congress is readying a stimulus package that could include some generous incentives for homebuyers.
The Senate added to the $900 billion stimulus bill on Wednesday a home purchase tax credit of $15,000, or 10% of the purchase price. If it's included in the bill that goes to the White House, that would represent a big gain not just for potential buyers, but also for the home builders and real-estate agents' groups that have aggressively promoted such a proposal for months as part of their "Fix Housing First" lobbying effort.
The second plank of that lobbying effort — a proposal for federally subsidized 4% interest rates on 30-year fixed-rate mortgages — isn't in the bill, but Senate Republicans are pushing for such a buy-down to spur home sales. Already, the Federal Reserve Bank has tried to lower interest rates by buying up securities backed by mortgages. However, after 10 straight weeks of declines, interest rates have edged up slightly in recent weeks.
Policymakers will also consider increasing limits on loans eligible for financing from government-backed mortgage entities to as high as $729,750 in the nation's most expensive housing markets. The stimulus bill that passed in the House last week included the provision.
Discuss: Would a $15,000 tax credit spur you to buy a home?
The Senate on Wednesday also approved $2 billion for state agencies to finance affordable housing.
Economists are skeptical that a builder tax credit or interest rate subsidies will stimulate the economy. Indeed, some argue encouraging the construction of new homes will only prolong the pain. "It is targeted not to the people who need help but an industry that wants a huge subsidy," said Thomas Lawler, an independent housing economist. "Why give an unbelievable gargantuan subsidy only to people who buy a home? What about renters who are in more dire straits?"
Proponents of a tax credit point to similarly structured subsidies that Congress approved in 1975. The program gave qualified buyers a 5% credit up to $6,000 and brought down interest rates by around 1.5%, to 7%. But critics say that the analogy is misleading because the U.S. was exiting a recession that had been induced by oil prices, not a slide in home values.
"By artificially increasing prices we are encouraging more building," says Harvard economist Ed Glaeser, who chided the Republican Party in a WSJ op-ed on Thursday for embracing interest rate subsidies.
By Nick Timiraos, The Wall Street Journal