Meet the Author

O. Emre Ergungor |

Assistant Vice President and Economist

O. Emre Ergungor

Emre Ergungor is an assistant vice president and economist in the Research Department at the Federal Reserve Bank of Cleveland. He is responsible for the household finance section of the Banking Policy and Analysis Group, which conducts research on regulatory policy and banking issues and provides advice on financial policy formulation. He also oversees the Federal Reserve System’s Muni Financial Monitoring Team (FMT), which monitors municipal bond markets, state and local funding, and public pension funds. Dr. Ergungor specializes in research related to financial intermediation, information economics, housing policy, and credit access in low- to moderate-income households.

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Meet the Author

Beth Mowry |

Research Assistant

Beth Mowry

Beth Mowry was formerly a research assistant in the Research Department of the Federal Reserve Bank of Cleveland. Her work focuses on labor markets and business cycles.


Economic Trends

The Homebuyer Tax Credit

Emre Ergungor and Beth Mowry

Efforts to aid the floundering housing market began in full force back in July 2008 with the passage of the Housing and Economic Recovery Act. The act created a $7,500 maximum tax credit for first-time homebuyers, though it required homeowners to repay the full amount of the credit over a fifteen-year period. Later legislation expanded the credit to $8,000 and removed the repayment requirement. Most recently, the Worker, Homeownership, and Business Assistance Act expanded the program even further by including existing homeowners who were purchasing new homes, allowing them to receive up to a $6,500 credit, and extending the deadline to enter a binding contract to April 30. Now that the tax credit has expired, the question emerges as to whether the programs were enough to jump start the housing market or whether they merely cannibalized future sales.

Prices seem to have received a boost from the tax credit, as shown by positive year-over-year growth in the S&P/Case-Shiller Index and the FHFA Index’s flirtation with positive territory. The year-over-year growth of the 20-city S&P/Case-Shiller Home Price Index climbed from its January 2009 trough of −19.0 percent to 3.9 percent in April, and the Federal Housing Financing Agency’s (FHFA) monthly Purchase-Only Index has improved from a record year-over-year decline of −8.8 percent to its present −1.5 percent.

Note that the path of recovery is proceeding differently across various regions of the country. Generally, regions with the largest price buildup prior to 2007 also saw prices tumble the most. The Pacific region was hit hardest, with year-over-year growth in the FHFA price index dropping below −20 percent in 2009. The recent uptick of 3.1 percent suggests a return to a more stable pricing environment. West South Central is the only region that maintained a semblance of stability during the recession, with home prices essentially remaining unchanged. The East North Central region, which includes Ohio, fell 1.1 percent below its year-ago price levels, slightly beating the national FHFA index, which fell 1.5 percent.

The tax credit also appears to have provided support to new and existing home sales. The pace of new home sales had plummeted about 76 percent between its peak in July 2005 and January 2009. However, new sales spiked 14.7 percent in April before dropping off precipitously (32.7 percent) to a record-low sales pace of 300,000 annual units. This drop raises the possibility that the improvement in sales before the expiration of the tax credit may have come at the expense of future sales. It is also important to note that the most recent decline is primarily driven by the drop in sales in the South and West. The Midwest and Northeast were stable, albeit still stuck at very low levels.

Existing home sales saw solid growth throughout much of 2009, particularly in November, when the tax credit was originally set to expire but instead was extended until April 2010. This final extension, however, seems to have created a much weaker sale response, suggesting that the credit may have lived out its effectiveness.

Immediately after the expanded tax credit went into effect, the inventory of existing single-family homes jumped from 6.2 months at the current sales pace to 8 months, primarily due to a sharp increase in the number of homes for sale. This suggests that the decline in inventory that occurred previously might be misleading. One would have hoped that the decline in excess supply is due to demand catching up with it permanently, which would indicate that prices are approaching stable levels. However, the rapid growth in inventory we are experiencing now suggests that there are a significant number of involuntary homeowners, who wish to sell their homes but have been sitting on the sidelines, waiting for the storm to pass. The activity created by the tax credit may have convinced some of them to list their properties for sale. This so-called “shadow inventory” of properties may have a depressing effect on housing prices going forward.

Overall, the housing sector remains on shaky ground and recovery is still a way off. The tax credit gave a temporary boost to the market up until May, and now the question will be whether the housing market can function without it.