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RISMEDIA, September 28, 2009—A recent survey conducted by Zillow in conjunction with Harris Interactive asked prospective first-time homebuyers how an extension of the $8,000 tax credit would influence their decision to buy a home next year. If the credit were extended, of those who intend to buy a home, 18% called the credit the “primary influence” in their decision, 25% said it would be a “significant influence,” and 27% said the credit would have “some” influence on any home buying decision. Thirty-one percent said it would have no influence at all on their decision to purchase. 

According to further analysis, this suggests that the extended tax credit could, at minimum, stimulate an additional 334,000 home sales compared to what we would otherwise expect to see during the period between December 2009 and November 2010. That could spell the difference between a 5% annual increase in home sales over the period assuming an extension of the tax credit, versus a 2% annual decline in home sales without the tax credit. With no extension, there’s a good likelihood that home sales this January will dip below their January 2009 level (257,000 home sales in the month). This seems likely given that January 2010 home sales would be hit both by the loss of incremental home sales that would have been stimulated by the tax credit, as well as by the loss of sales that were pushed up to September or October 2009 (i.e., people who would have normally bought in January buying in September instead in order to avail themselves of the tax credit). 

Of course, to get those 334,000 incremental home sales next year, we’ll have to give the tax credit to an estimated 1.86 million first-time home buyers, creating a net cost to the government of $14.86 billion for the extension. This gives one some sense of the magnitude of the leakage of the tax benefit to those that would have taken the desired action (buying a home) even without a government incentive. For every five homeowners who get the tax credit, four of them would have bought the home anyway. In essence, this means that the government will have to pay roughly $44,000 per home in order to obtain 334,000 more home sales than would have occurred without the tax credit. 

Creating demand seems like a worthwhile endeavor, even if it’s temporary or simply shifts future demand closer to the present. Marginal demand is likely needed much more in the short-term to get the engine running again than it is long-term when the engine will be running on its own accord (i.e., the eventual bottom in home prices and decreasing unemployment will be large demand boosts). The trouble is, it’s quite possible the upside pressure created by this marginal demand is likely to be completely overwhelmed by the downside pressure created by the massive numbers of foreclosures we’ll see as the foreclosure rates increase on their way to a peak next year. The full methodology of the survey and the analysis is available here. 

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