Buying a Home For All the Wrong Reasons

Los Angeles Times , February 03, 1992

President Bush’s $5,000 tax credit for first-time home buyers is a bad idea. I should know. I’m a first-time home buyer.

My husband and I decided to buy a townhouse for three reasons: Our apartment building was simultaneously falling apart and threatening to go condo. The Los Angeles real-estate bubble had finally burst. And we were tired of getting walloped with income taxes.

The last reason--desperation for the tax break provided by the mortgage deduction--pushes a lot of people into buying homes. To lower our income taxes, we’re liquidating our portfolio of mutual funds and pouring it into a single, very risky asset. We’re also taking on six figures of debt. (And we don’t even own a second car, nor are we likely to once we become mortgage payers.)

Multiply our decision by millions of households and it’s not hard to see why Americans don’t save. They’re too busy making mortgage payments. The first-time home-buyer credit is designed to lure even more money out of savings and into real estate and to entice even more young people into debt.

The credit has other flaws. For one thing, first-time buyers are the last people who need help in a housing recession. We’re the big beneficiaries of the drop in housing prices. In fact, last year first-time buyers accounted for 45% of all home buyers in California, compared to 37% in 1990 and an average of 38% from 1981 to 1991. The best way to help people afford homes is to keep interest rates low and to leave the real-estate market alone.

It isn’t surprising, therefore, that the credit will not actually help first-time buyers. Instead, it will prop up housing prices and help home sellers. That’s because the supply of housing is more or less fixed in the short run--and this is, after all, only a one-year tax credit. A fixed supply means that any increase in demand caused by the credit will be reflected in higher prices. Knowing that they’ll get the tax credit, buyers will pay up to $5,000 more for a house.

The federal government wants to keep housing prices high for two reasons: When homeowners feel richer, they’re more likely to feel happy, spend money and vote for incumbents. And higher prices in general mean higher prices for thousands of homes the government has acquired from failed savings and loans.

What is most disturbing about the President’s proposed tax breaks for real estate--not only the $5,000 credit but less-populist provisions such as the passive loss deduction--is what it says about the death of supply-side economics. The original supply-siders had a much broader idea than they’re usually given credit for: that taxes should serve simply to finance the cost of government and that they should distort people’s economic decisions as little as possible. Supply-siders wanted to lower marginal tax rates, not create loopholes.

Supply-side popularizer Jude Wanniski emphasized “the wedge,” the burden that taxation put on economic transactions by, for example, making it more expensive to hire an employee because of high payroll taxes. Cutting tax rates reduced the wedge. Flattening tax rates was a way to stop punishing people for making more money, thereby giving them an incentive to work harder.

Today such supply-side politicians as Housing and Urban Affairs Secretary Jack Kemp and House Republican Whip Newt Gingrich have forgotten this theory and become shills for special interests, notably the real estate industry. Kemp has even called owning real estate “an inalienable right.” To take that claim seriously would be to advocate Marxist-style land reform and to prohibit selling property.

Meanwhile, it is Democratic Sen. Daniel Patrick Moynihan who is talking about lowering payroll taxes and Democratic presidential candidate Jerry Brown who is pushing a 13% flat tax. Both of these are fundamental reforms aimed at reducing real tax burdens--including the burden of hiring accountants and lawyers to find loopholes.

These reforms would give people more freedom and flexibility to make their own economic choices, undistorted by the lure of tax breaks. As a long-time taxpayer, I’d prefer either of these plans to President Bush’s one-time gimmick. As a first-time home-buyer, of course, I will be happy to accept the $5,000.