A federal program meant to help stabilize the economy during the 2007–10 financial crisis worked wonders for the housing market, but didn’t measurably add to GDP.

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Northwestern University’s David Berger, the US Office of Tax Analysis’s Nicholas Turner, and Chicago Booth’s Eric Zwick set out to determine if the Internal Revenue Service’s First-Time Homebuyer Credit spurred any real boost in the housing market or simply fast-forwarded by a few months sales that consumers planned to make anyway.

The FTHC was one of several programs meant to boost the economy amid the crisis that saw housing-price increases slow, real-estate prices regress, and unsold housing inventory double from 2004 to 2008. Early versions of the program provided interest-free loans of up to $7,500 for first-time buyers. But later versions, on which the researchers focus, turned the loans into refundable tax credits (which reduce tax liability) of up to $8,000 for first-time buyers. The program ran from 2008 to 2010.

The loans and credits increased home sales, especially for people who were able to make mortgage payments but who would have had a hard time coming up with a down payment.

Was the First-Time Homebuyer Credit good policy?

Some worried the program would simply attract people already planning to buy a house, rather than people who otherwise would not have bought one. If that happened—and people who were already planning to buy a home moved their purchase up by a few months to take advantage of the tax credit—it’s likely that housing sales would have spiked, fallen sharply to preprogram levels or below, then stagnated.

But the data suggest something else happened. The researchers estimate that home sales increased by at least 7 percent nationwide during the years of the FTHC program. And they saw only an insignificant dip in sales in the months after.

Berger, Turner, and Zwick compared sales in areas that typically appeal to first-time buyers—those with good schools and particular house types—to sales in areas unlikely to draw in first-time buyers, particularly areas with significant poverty or affluence.

They find that the FTHC induced an estimated increase in home sales of 397,000–546,000, or 7–11 percent, across the United States.

Without the tax credits, some of those sales would have likely been made at least two or three years later, the researchers say. When the FTHC was available, the median age for first-time home buyers was 33; but when it wasn’t, the median age was 35.

“A noticeably younger cohort of first-time buyers appeared in 2009 alone, driven by the temporary policy incentive to accelerate transition into homeownership,” the researchers write.

Evidence that the First-Time Homebuyer Credit worked
Researchers saw a predictable spike in home sales close to the program’s deadlines—and no stagnation afterward, which some had feared.

The credit spurred people to buy distressed or vacant homes. More than a quarter of those homes were in foreclosure or were part of lenders’ real-estate-owned portfolios. Another 16 percent had been built in the few years before the housing market crashed and were sold by builders who still owned them. Because previously built homes do not directly add to GDP, the effect on GDP was insignificant, and any injection to the economy came from realtor fees, appraisals, or other costs.

Those sales did stabilize the housing market, however. First-time home buyers were no more likely to default on their mortgages than first-time buyers in the years after the FTHC program ended. And housing prices rose after 2010, increasing housing wealth by between $100 billion and $200 billion.

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