author, ‘The End of Loser Liberalism: Making Markets Progressive’
Posted: 04/18/2012 9:04 pm
It’s often said that the difference between the powerful and the powerless is that the powerful get to walk away from their mistakes while the powerless suffer the consequences. The first-time homebuyers’ tax credit provides an excellent example of the privilege of the powerful.
The first-time homebuyers tax credit was added to President Obama’s original 2009 stimulus package. It was introduced by Senator Johnny Isakson, a Republican from Georgia, but the proposal quickly gained support from both parties. The bill gave a tax credit equal to 10 percent of a home’s purchase price, up to $8,000, to first time buyers or people who had not owned a home for more than three years. To qualify for the credit, buyers had to close on their purchase by the end of November, 2009, however the credit was extended to buyers who signed a contract by the end of April, 2010.
The ostensible intention of the bill was to stabilize the housing market. At least initially it had this effect. There was a spike in home purchases that showed up clearly in the data by June of 2009. House prices, which had been falling at a rate of close to 2.0 percent a month stabilized and actually began to rise by the late summer of 2009, as buyers tried to close on a house before the deadline for the initial credit. There was a further rise in prices around the end of the extended credit in the spring of 2010.
However once the credit ended, prices resumed their fall. By the end of 2011 they were 8.4 percent below the tax credit induced peak in the spring of 2010. Adjusting for inflation, the decline was more than 12.0 percent.
The problem was that the credit did not lead more people to buy homes, it just caused people who would have bought homes in the second half of 2010 or 2011 to buy their homes earlier. This meant that the price decline that was in process in 2007-2009 was just delayed for a bit more than a year by the tax credit.
This delay allowed homeowners to sell their homes for higher prices than would otherwise have been the case. It also allowed lenders to get back more money on loans that might have otherwise ended with short sales or even defaults. The losers were the people who paid too much for homes, persuaded to get into the market by the tax credit.
This was the same story as the in the original bubble, but then the pushers were the subprime peddlers. In this case the pusher was Congress with its first-time buyer credit.
According to my calculations, the temporary reversal of the price decline transferred between $200 and $350 billion (in 2009 dollars) from buyers to sellers and lenders. Another $15-25 billion went from homebuyers to builders selling new homes for higher prices than would otherwise have been possible.
While this might look like bad policy on its face, it gets worse. The tax credit had the biggest impact on the bottom end of the market, both because this is where first-time buyers are most likely to be buying homes and also an $8,000 credit will have much more impact in the market for $100,000 homes than the market for $500,000 homes.
The price of houses in the bottom third of the market rose substantially in response to the credit, only to plunge later. To take some of the most extreme cases, in Chicago prices of bottom tier homes fell by close to 30 percent from June 2010 to December of 2011, leading to a lose of $50,000 for a buyer at the cutoff of the bottom tier of the market. The drop in Minneapolis was more than 20 percent or more than $30,000. First-time buyers in Atlanta got the biggest hit. House prices for homes in the bottom tier have fallen by close to 50 percent since June of 2010. That is a loss of $70,000 for a house at the cutoff of the bottom tier.
Many of the 11 million underwater homeowners in the country can blame the incentives created by the first-time homebuyers credit for their plight. This was really bad policy, which should have been apparent at the time. Unfortunately, it is only the victims who are suffering, not the promulgators of the policy. Welcome to Washington.
Enterprise Community Partners
Tax Credit Advisory
Never have the future livelihoods of so many Americans and industries depended on the actions of so few in Washington. If you’re guessing this refers to the new “Super Committee,” you’re right.
When Congress reconvenes each September, there’s normally reason for hope among advocates that lawmakers will pass some bills favorable to affordable housing and community and economic development before year-end.
However, this year is different. Advocates are preparing for hunker-down mode to defend against likely Congressional attempts to cut federal spending for housing and community development programs and to scrutinize individual federal tax expenditure programs for their cost, benefit, and efficiency. The focus on deficit reduction was elevated in July when Sen. Tom Coburn (R-Okla.) unveiled his 624-page, $9 trillion deficit-cutting plan, Back in Black, which proposes the termination of the federal low-income housing, historic rehabilitation, and new markets tax credit programs, plus the HOME program administered by the U.S. Department of Housing and Urban Development (HUD).
The pressure intensified with the August 2 signing of the Budget Control Act of 2011. While raising the federal debt ceiling, it also directed $917 billion in federal spending savings over 10 years and the creation of a new bipartisan Joint Select Committee on Deficit Reduction (“Super Committee”). The Committee is to develop, approve, and submit for Congressional approval a package of specific legislative changes to reduce the federal deficit by at least $1.5 trillion over federal Fiscal Years 2012-2021. Appointed in August, panel members must convene by September 16, shortly after Congress returns from the Labor Day recess. (See sidebars for panel members, details of the deficit reduction plan, and key deadlines.)
The Super Committee has broad discretion to propose cuts in federal spending, tax revenue increases, or a combination of both.
Because of the deficit reduction schedule and the belt-tightening mood in Washington, advocates expect Congress to be preoccupied with deficit reduction for the rest of 2011. Existing federal spending programs and tax incentives that support affordable housing and community and economic development are certain to be reviewed closely and potentially targeted for cuts. In fact, the Administration has already ordered federal
departments and agencies to develop proposed FY 2013 budgets that trim spending at least 10% from the enacted FY 2011 levels.
Rebuttal of Coburn Proposal
Affordable housing advocates quickly responded to Sen. Coburn’s proposal to eliminate the low-income housing tax credit (LIHTC) program. The Affordable Housing Tax Credit Coalition drafted a rebuttal statement that was endorsed by 558 organizations and sent to Sen. Coburn and to other members of Congress. The National Council of State Housing Agencies (NCSHA) also sent a separate letter to Sen. Coburn defending the LIHTC and HOME programs.
The Coalition statement refuted as inaccurate or misleading many of the reasons and statistics cited by the Coburn plan to support its proposal to terminate the housing tax credit. The statement, for instance, pointed out that the allegation of the program’s inefficiency was based on findings from a study of the Missouri state housing tax credit, not the federal housing credit.
“…The Senator’s call for repeal of the low-income housing tax credit would eliminate the most important and successful program for critically needed affordable rental housing,” the Coalition’s rebuttal letter said, “thus depriving millions of low-income families and seniors of a decent place to live, and killing thousands of well paying jobs at a time of severe unemployment.”
NCSHA’s Garth Rieman said, “Our reaction was that many of the arguments that Senator Coburn made in his letter weren’t accurate, or aren’t compelling. And when you consider the need for the program and its performance and success, we think there’s no question that Congress and the Administration need to continue this program.”
Still, the overall plan and its proposal have made a mark.
“If you ignore his plan you do so at your own peril,” says Peter Lawrence, of Enterprise Community Partners, Inc., an ardent advocate of the housing and newmarkets tax credits and of federal housing programs. Senator Coburn was a member of the bipartisan “Gang of Six” that tried to put together a deficit reduction proposal.
“In this volatile political and fiscal environment,” Lawrence said, “where Congress is under such incredible pressure to take steps for deficit reduction, and potentially tax reform, having such a very detailed menu of choices, so to speak, to fill the pressure for deficit reduction means that you have to take [the Coburn plan] very, very seriously.”
In Crosshairs, Time to Rally the Troops
Washington, D.C. attorney Richard Goldstein, Counsel to the Affordable Housing Tax Credit Coalition and a partner in the law firm Nixon Peabody LLP, noted that the deficit reduction focus in Congress puts federal spending programs for housing – those of HUD and of USDA’s Rural Development – “very much on the chopping block.” Tax expenditures will be “on the table” as well, he added. Republicans successfully opposed any tax increases in the final deficit reduction law. Yet lawmakers might still be able to hew to this bright line but agree to revenue raisers described as tax loophole closers, or even to cutbacks in certain existing tax expenditures.
Goldstein characterized the present time as an “all hands on deck” moment for LIHTC stakeholders. He said all LIHTC industry members and program supporters – not just lobbyists and Washington-based trade associations – need to get busy educating their members of Congress and staffs about the benefits and track record of the LIHTC program; taking them on tours of properties in their districts; and inviting them to project groundbreaking and ribbon-cuttings. “This is crunch time,” says Goldstein. “No one should have any complacency.”
National Housing & Rehabilitation Association Executive Director Thom Amdur concurred, observing, “Now is not the time to be shy. This could be the 100- year storm for affordable housing and tax credit deveopment if we aren’t prepared. Even previously sacrosanct programs like the LIHTC, historic credit, and Section 8 are at risk, to say nothing of programs like HOME and the new markets credit which are already targeted.”
Supporters of new markets and historic tax credits, of tax-exempt bonds, and of federal housing spending programs are mobilizing as well.
Reaction to Appointments
Regarding the make-up of the Super Committee, Lawrence noted that Democratic Sens. Patty Murray (Wash.) and John Kerry (Mass.) have been great supporters of affordable housing, and Sen. Rob Portman (R-Ohio) has supported the LIHTC program. In addition, Goldstein noted that House Minority Leader Nancy Pelosi’s appointments – Democratic Reps. Chris Van Hollen (Md.), Xavier Becerra (Calif.), and James Clyburn (S.C.) – are “very good for the housing credit,” and that Rep. Dave Camp (R-Mich.), House Ways and Means Committee chairman, has supported the housing credit in the past.
On the other hand, Lawrence said Rep. Jeb Hensarling (R-Texas), the Super Committee co-chair, “has been a conservative when it comes to housing and community development.” Super Committee members are generally regarded as pragmatic lawmakers who will try hard to craft and approve a deficit reduction package. Failure will trigger $1.2 trillion in across-the-board spending cuts hitting both defense and domestic programs.
Prospects for Tax Reform, Other Bills
The advocates generally didn’t expect Congress to pass comprehensive tax reform legislation this year or next, but rather to continue hearings and perhaps make some piecemeal tax law changes. They expected the same on GSE and housing finance reform.
Advocates were uncertain whether Congress will pass a separate “extenders” bill before year-end; a number of federal tax credits and tax incentives are scheduled to lapse December 31, including the new markets tax credit program. Lawrence indicated that it could be awkward for Congress to approve a package of extenders costing additional tax expenditures after passing deficit reduction legislation. Still, extenders might possibly be tucked into some type of opportune legislative vehicle.
LIHTC program supporters will also be looking for opportunities this fall to convince Congress to adopt a few, non-controversial, low-cost, favorable LIHTC amendments. Bills proposing such LIHTC amendments are expected to be introduced soon by lead sponsors from both parties on the House and Senate tax-writing committees. While the package of provisions hasn’t been finalized, under strong consideration are a proposal to extend the current minimum floor of 9% for the 70% present value housing credit, and a proposal to establish a minimum rate of 4% for the 30% present value credit for acquisition costs only (but not also fortax-exempt bond-financed costs).
The Rental Housing A.C.T.I.O.N. Campaign, an umbrella advocacy group for the LIHTC program with many participating organizations, has reactivated and is working to reach consensus on specific LIHTC amendments that it would like to see passed, and a letter it will then circulate to seek the support of lawmakers as cosponsors of a bill, said Lawrence.
NCSHA, which supports the Campaign and the proposals to extend the floor for the 9% credit and create a floor for the 4% acquisition credit, has its own list of priority legislative changes that it favors for the LIHTC program and for tax-exempt housing bonds, Rieman noted. In addition, NCSHA is continuing to work with the U.S. Treasury Department to try to get an extension beyond year-end of the deadline by which state housing finance agencies have to close housing bond issues under the New Issue Bond Program, and to seek a few other changes to make the program work better for HFAs.
Advocates were doubtful that Congress will pass any significant housing bills before year end, other than FY 2012 appropriations legislation to fund federal housing programs. In the past, the annual HUD appropriations bill has sometimes carried substantive housing authorization provisions – and this can’t be ruled out.But even here, it’s virtually certain that Congress won’t pass regular FY 2012 appropriations bills before the October 1st start of FY 2012, and will therefore have to pass one or more short-term continuing resolutions to fund the entire government. Stopgap funding bills are usually clean of non-spending riders. Congress may even have to resort to a single consolidated spending bill for the entire government for the rest of FY 2012.