Broker to Congress: Don't Extend the Credit (Just Keep Rates Low)

Here I am, back in Washington DC, past midnight, in a hotel room with my favorite rubber giraffe and a snoring baby. I just got into bed but can’t sleep because Congress looks like it might extend the first-time home-buyer tax credit. The new Chris Dodd-sponsored deal CJD_fronthas bipartisan support and a deal is at hand.

And it’s a big mistake.

The National Association of Realtors, The National Association of Home-Builders and The National Association of Mortgage Brokers have poured everything they’ve got into the extension of this credit, sometimes arguing that it’s good for consumers, at other times cravenly acknowledging that it’s also a sop to a beleaguered industry. As a broker ourselves, and a consumer advocate, Redfin has every reason to agree with the NAR’s position.

But the truth is that the credit won’t make much difference for consumers. It solves the wrong problem. It spends  money we don’t have. And even if the credit is extended, enough home-buyers rallied for the original November 30 deadline that there will still be a December lull in demand.

It Won’t Make Much Difference
So first things first. The first-time home-buyer tax credit hasn’t been a major factor in the recovery. The Brookings Institute estimates that the credit increased demand among first-timers by only 15%, so that each incremental home sale has actually cost the government $43,000 or more. Our own experience suggest that this number is, if anything, low, as demand among first-timers has increased at Redfin only 11%. At least some of that increase is because, in the current market, 2nd-time home-buyers can’t afford to sell their first home.

The National Association of Realtors’ arguments in favor of the credit don’t make sense. When August sales volume slipped ever so slightly, the NAR was quick to blame the dip not on the seasonal tendency for many would-be home-buyers to hit the beach, but on the expiration of a credit that was still four months off. Even as the NAR warned that first-time home-buyers had begun to abandon the market, the same press release noted the percentage of first-time home-buyers had remained unchanged from July to August. A month later, when it was at least remotely conceivable that a September deal might not close before the November 30 deadline, the NAR reported that sales volume increased; that press release argued all the same for the extension of the credit.

It Solves the Wrong Problem
And the problem isn’t that there aren’t enough buyers. Between 1994 and 2005, the percentage of Americans who owned homes rose by almost 10%. Even after two years of record rates of foreclosure, the U.S. home-ownership rate is at 67.4%, whereas it was at 64% before the bubble. The government can stave off a further decline by extending this one-time credit, but with unemployment above 10%, it may just encourage people to buy homes they later can’t afford.

This isn’t to say that Redfin begrudges the folks who have been able to take advantage of the credit so far; far from it. And we’re certainly not against home-ownership. Helping people get a home is, for us, very fulfilling; it is more fulfilling for me than anything I’ve ever done professionally.

But that doesn’t mean we tell every Tom, Dick and Harry to buy a home. We have a fiduciary obligation to advocate fiscal responsibility, even — as we emphasize to every new hire — to dissuade home-buyers from a rash purchase. In this era of responsibility that was supposed to have been inaugurated after the credit crunch, it seems inarguable that people shouldn’t buy a home unless they can afford it on their own.

The Problem is Inventory, Not Demand
And we worry that these one-time government incentives have already lost sight of that principle. The major destabilizing force in real estate today isn’t a dearth of buyers. Credit or no credit, buyers would still be out in force, primarily because prices and interest rates are relatively low. The problem is foreclosures, which don’t just affect the temporary gyrations of home prices but fundamentally lower the value of the underlying asset, American real  estate.

Trust us on this one. Redfin tours a hundred foreclosed homes a day and most are absolute dumps. Ask any home-buyer what she worries about, and it isn’t that nobody will want to buy a house. It’s that delinquent loans are still piling up three times faster than banks can handle them. Nobody wants to buy a house only to find that foreclosures at fire-sale prices have ripped the bottom out of the local market again. The #1 way to stabilize the housing market is to limit the number of foreclosures being sold, not to increase the number of people who buy them.

A First-Time Home-Buyer Credit and The Time Machine
To that end, we have an alternate proposal. We still want to help first-timers, particularly those who don’t have a lot of money. But why not offer a first-time home-buyer tax credit to the real victims of the bubble, first-time buyers from 2006? The credit could be limited to help re-finance the predatory loans which overwhelmingly occurred in a one-year span between 2005 and 2006.

“What about moral hazard?” the suddenly Scroogey capitalists will argue. We say that these home-buyers have been through enough hazard. We treat the buyers of 2006 as if they  deserve whatever misery the bank can inflict on them, yet we eagerly court a new generation with a fresh set of one-time incentives that will yield a new set of fees.

It seems particularly heartless that we in the real estate industry would focus all of our attention on new home-buyers, when the folks now facing foreclosure were our customers only a few years ago. Instead of making the system more efficient or compassionate, we just try to feed the bloated beast by keeping the number of transactions in the U.S. too high.

We Can’t Afford It
And we can’t afford to do this. The primary factor driving affordability is not an $8,000 one-time credit, but low interest rates. At some point, government spending drives interest rates up. If rates increase from 5.3% to 6.3%, the real cost of a typical home will be almost $100,000  higher, credit or no credit. More important, we will have closed the one exit that folks facing foreclosure have been able to avail themselves of, re-financing.

It’s scary to think what the world will look like if that happens: foreclosures will get much worse, and inventory will climb even as demand drops. In such a scenario, the market could suffer a second steep drop, and the government, having exhausted its credit, will have fewer levers to pull it back.

But for now it’s easier simply to feed the beast. Just this once, let’s not do it.


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  • Cynthia

    Glenn – I wholeheartedly agree, and like your thinking on a tax credit for people who bought during the bubble.

    I was of the mind that the proposed expansion would meet this idea to a degree; assuming people can find a buyer willing to pay the inflated prices of those days. But on second thought …

    We’re moving up and would (luckily?) qualify under the proposal, but breaking even on the former property is a long shot. Instead of creating a property for first-time homebuyers — thus perpetuating the cycle, we’re adding another rental to the mix as we wait for the market to go back up.

    We made a decision to move before all this went down, but would we have done it because of the credit? Probably not. But we would have applauded a bubble-buyer credit.

  • Hibryd

    “The #1 way to stabilize the housing market is to limit the number of foreclosures being sold, not to increase the number of people who buy them.”

    This is a hideous idea. Prices are too high right now in the Bay Area specifically because there’s a severe shortage of REOs on the market. We need more of them for sale, not fewer.

    ” ‘What about moral hazard?’ the suddenly Scroogey capitalists will argue. We say that these home-buyers have been through enough hazard.”

    But they’ve enjoyed living in a home, a real home, over the last few years. I didn’t buy in 2006. I did the responsible thing and worked extra jobs and saved like mad and have spent those last three years in a small, crappy apartment JUST so that I could one day buy a home worth living in. I guess I should have bought after all – then people like you would be calling me a victim and lobbying to help me, and I could have had those pets and a grill and a garden and everything else I’ve wanted all these years. As it is you’re lobbying to use my tax dollars to “save” the homes of people who have more than I do.

    You want to help home buyers and bring stability to the market? Let’s get this wave of foreclosures over with and let things return to an affordable normal.

  • KG

    This is a great argument G. I agree the credit seems like a (very expensive) band-aid to me and the biggest factors are affordability and low rates.

    Bonus points for the Sophie reference (that’s the giraffe’s name btw).

  • Glenn Kelman

    KG, good to know that my rubber giraffe is called Sophie…

    Hibryd, I agree that low housing prices are treated as an apocalypse when really it’s a boon for folks who need shelter. I disagree that the folks who bought a home in 2006 and have now lost their job might not need a little help.

    Cynthia, congrats again on the big move!

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  • rachel

    I completely disagree with this commentary. Especially as a person who lives in one of the most expensive parts of the country- the Bay Area. I am a single person and have wanted to purchase a home for quite a while. My salary is stable, and have strong resources. The over inflated markets in CA have been the main deterrent to being able to afford a home.

    The housing bubble and the mortgage crisis in the country is the result of greedy bankers taking advantage of a deregulated system, and mis-informed, mis-guided and over-leveraged society who believes more is better. Many people got sucked into buying homes they could not have possibly afforded, during a time when interest rates where not “real” (AKA, the ARMs and Zero down payments) the 2006 homebuyers bought into the idea of being able to buy a home without fully being aware of consequences; mortgage brokers took advantage of this, and made LOTS of money (which by the way, they are still making money, despite the fallen rates and home costs).

    The first time buyers credit allows the opportunity for someone like me to finally be able to enter the housing market. It is unfortunate that it is on the backs of other others who have lost jobs, whose houses have lost equity, who can’t make their monthly payments. Extending a credit to save the those who have fallen prey to the consequences of greedy brokers and mis information is not what should be done. The mortgage companies and banks need to work harder to renegotiate those “bad loans” and re-evaluate whether these folks where ready home owners.

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