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Shocker: homebuyer credit a fraud magnet

June 24, 2010

While the first-time homebuyer credit was an expensive boondoggle, it did provide an important stimulus to the nation's hard- pressed but crucial prison commissary sector. The TaxProf reports:

1,295 prisoners receiving credits totaling $9.1 million who were incarcerated at the time they reported that they purchased their home. These prisoners did not file joint returns, so their claims could not have been the result of purchases made with or by their spouses. Further, TIGTA found that 241 prisoners were serving life sentences at the time they claimed that they bought new primary residences.

But at least it revived the housing market, right? Tax Analysts reports ($link)

Ted Gayer, a senior fellow at the Brookings Institution, agreed with Mitchell, calling the credit "very poorly designed" and "ripe for fraud." He noted that with each extension, the credit was expanded to subsidize more purchasers without discriminating between people who would have bought without the subsidy and those who couldn't have. "Each step of the way we've thrown money at the wrong problem -- that there is a very weak housing market caused by excessive supply," Gayer said.

Gayer said the proof is in the May housing numbers, which he called "terrible." After the credit's April 30 contract due date lapsed, new single-family home sales dropped more than 18 percent below estimated declines, suggesting that the credit has not led to a self-sustaining recovery in the housing sector. Even existing home sales, which were partially buoyed by the credit, were "surprisingly weak," he said.

Ooops. Given this impressive record of unrelieved failure, there are of course congresscritters eager to continue the program. The HR 4213 "extender" bill wouldn't extend the program itself, but it would give those who already have bought houses more time to close.

Cato Institute analyst Daniel Mitchell looks on the bright side:

Mitchell said he would be "very surprised if the credit had a net positive effect on housing" but that the implications if the credit did work "would be worse." Mitchell explained that he would prefer the credit to be "a short-run waste of money rather than a long-term distortion in the allocation of capital into the residential housing market."

Hey, we'll take what good news we can find.