Tax Credits and the Multifamily Market

In an effort to hasten the absorption of the nation’s vacant housing inventory, first-time home-buyer tax credits, originally introduced in 2008, were expanded in their scope and benefits last February. Under the terms of the American Recovery and Reinvestment Act of 2009, certain low- and middle-income earners qualify for a tax credit of 10 percent of their new home price, up to $8,000. Significantly, the 2009 version of the incentive is a true tax credit, whereas the 2008 version needed to be repaid in 15 equal annual installments and so functioned as a long-term interest-free loan.

The 2009 tax credit is due to expire in less than two months, on Dec. 1. In anticipation of that sunset, a growing chorus of lawmakers has voiced its support in recent weeks for an extension of the credit into mid- or late 2010.

Following a meeting last Wednesday with President Obama, House Speaker Nancy Pelosi signaled that the credit might also be expanded to include current homeowners seeking to purchase a new residence. Closer to home, Charlie Rangel echoed Speaker Pelosi’s general comments in saying that “there’s no question that I think it should be extended.” Harry Reid is co-sponsoring bipartisan legislation that will extend the program for six months. At the White House, Robert Gibbs indicated only that expiring provisions were being evaluated.

At least among a cadre of the Congressional leadership, there is clear support for an extension of the credit. Ahead of a broader determination, the House passed a bill (H.R. 3590) on Thursday extending the credit through November 2010 for serving members of the Armed Forces and Foreign Service. Separately, Democratic Senator Chris Dodd is working with Republican Senator Johnny Isakson in evaluating a potential increase in the size of the credit as well as a six-month extension.

The program will prove costly; if it realizes its full measure of success, the cost to taxpayers will run into the billions of dollars. It is expected that these costs will be funded through an assignment of funds from the stimulus package.
Although backing for an extension may be gaining momentum, the question of whether the measure constitutes an effective public policy has not been fully addressed. Proponents of the extension contend that it will provide a necessary plinth for the shaky housing market and, by extension, the broader economy. In fact, the economic analysis suggests that households that will purchase homes even in the absence of the credit will capture the subsidy.

If the prevailing pressure on the housing market is the result of foreclosures on current owners, initiatives that are designed to spur demand are misdirected. As current owners fall behind on payments, the price declines that result from foreclosure sales will weigh on outcomes, tax credit notwithstanding. Given the need for careful management of the public purse, available resources should be directed squarely at the challenge of foreclosures.

For apartment investors and operators, programs that seek to bias tenure choice in favor of homeownership necessarily temper multifamily demand. The apartment market is already straining under the weight of withered demand from key renter groups. Axiometrics reports a third-quarter year-to-year decline in rents of 6 percent. Over the same period, Axiometrics reports that vacancy rates have inched up to 7.8 percent.

In the long run, the tax credit program might still warrant the industry’s support if it results in a more stable housing market and a more rapid recovery in the economy and labor market. After all, job creation is a necessary condition for the resumption of strengthening apartment fundamentals. However, since the tax credit is unlikely to advance the laudable policy goal of housing-market stability, a more vigorous debate is called for.

Sam Chandan, Ph.D., is president and chief economist of Real Estate Econometrics and an adjunct professor of real estate at Wharton. Tax Credits and the Multifamily Market