Remember when Uncle Sam would pay you to buy a home?
In the midst of the Great Recession, the government basically bribed first-time home buyers — with generous tax credits. Almost a decade later, with home prices surging across the country, many who did buy have been rewarded for their daring.
In the midst of the Great Recession, the government basically bribed first-time home buyers who were afraid of “catching a falling knife’’ — investing in a home even as prices were plummeting — with generous tax credits. Almost a decade later, with home prices surging across the country, many who did buy have been rewarded for their daring.
Ten years ago this month, home prices were steadily slipping after having nearly doubled between 2000 and 2006. It was almost a full year before the collapse of Lehman Brothers would mark the onset of a catastrophic global financial crisis. But by October 2007, Treasury Secretary Henry Paulson was calling the decline in housing “the most significant current risk to our economy.’’ He was right, of course, though most Americans still had no idea how bad it would get.
By early 2008, the still-worsening housing market was on life support and infecting the broader economy. Existing home sales had fallen nearly 50 percent from their 2005 peak, and prices showed no sign of bottoming out. “It was the worst economic conditions in nearly a hundred years,’’ said Lawrence Yun, chief economist at the National Association of Realtors.
As Congress tried to stanch the bleeding through various stimulus measures, it introduced a first-time home buyer tax credit aimed at stabilizing the housing market — and with it, it was hoped, the whole economy. The first phase, passed in July 2008, “was essentially just an interest-free loan to home buyers,’’ said Karen Dynan, a professor of economics at Harvard University. Income-eligible first-time home buyers could claim up to $7,500 when they filed their taxes, but then had to pay back the money.
It quickly grew apparent that more help was needed. “The program was modified to be more generous with the passage of the American Recovery and Reinvestment Act in February 2009,’’ Dynan continued. Home buyers who got that credit — now up to $8,000 — wouldn’t have to pay it back and could file an amended tax return for the previous year to get it early. That credit, which was eventually opened up even to some repeat home buyers, was extended into 2010.
Did the program, which the Government Accountability Office projected would cost about $22 billion, work as intended? The housing market did stop collapsing around the time the second tax credit was passed, but that coincided with a wide range of other stimulus measures. “Given everything else going on in the economy at the time, it’s hard to isolate the precise effects of the program,’’ said Dynan, who coauthored a study on the effects of the credit. But home sales and prices received a modest, if temporary boost, she said.
At least 3.3 million people took advantage of the home buyer tax credits in their various forms, and my wife and I were among them: We purchased our first home in 2008 and received what amounted to a $7,500 loan at 0 percent interest, which we’re still repaying each year.
Truth be told, the credit didn’t really push us to buy a house and save the economy — we got married the year before and were pretty hellbent on buying a house anyway. But knowing we’d have $7,500 coming our way did give us the confidence to buy an old fixer-upper. We promptly paid that money to local contractors at a time when construction work was pretty scarce.
Marc and Paula Roderick, who also received the $7,500 tax credit after buying their first home in Danvers in 2008, had a similar experience. “We were already looking, but the thought of having the extra money to throw at upgrades or repairs on a newly purchased home was definitely a motivator,’’ Marc said. The house they bought was in desperate need of a new roof, he said, so they used the entire tax credit to pay for one.
Delia Greve was able to get the $8,000 no-strings-attached iteration of the tax credit. After going to graduate school in Boston and working here for several years, Greve moved back to her native Seattle in 2008 and started looking for a place to buy in late 2009. “The home buyer credit gave me every incentive to finalize the deal,’’ she said. “I wanted to buy and was ready to buy, but the ending of the credit offer put a timeline on it.’’ She closed on her condo in June 2010
, just days before the credit was due to expire.
Greve says that timing feels especially fortunate in hindsight. “It was a great time to buy in Seattle, as prices had bottomed and were starting to climb, so I knew I had to jump on it,’’ she said. Had she waited much longer, she would have been priced out.
Buying a home is almost always a leap of faith, but that was especially true during the housing crisis. The Rodericks weren’t terribly fearful of losing their jobs, but they were worried about that “falling knife’’ possibility. Home prices were sinking so quickly, Roderick said, “we were more concerned with buying a home and having its value plummet afterward.’’
As luck would have it, the tax credit nudged millions of first-time buyers into the housing market at almost precisely the right time. In markets like Boston that have recovered from the housing crisis and then some, Uncle Sam helped steer first-time buyers into homeownership near the bottom of the market and set them up for long-term financial security if they were able to hang on through the doldrums of 2010 to 2012.
Home values have increased about 43 percent since the spring of 2009, according to the S&P CoreLogic Case-Shiller 20-City Composite Home Price Index. For a buyer who paid $327,000 for a median-priced Boston home in 2009, that works out to more than $140,000 in equity. (Present-day house hunters might understandably ask: On what planet could you find a home in Boston for $327,000? Amazingly, this one, just eight years ago — and the government would pay you $8,000 to buy it!)
In 2016, the average Boston-area seller had owned their home for seven years and 10 months before the sale — or since about 2008 — and profited an average of $182,500, excluding realtor commissions, according to an analysis by Zillow.
But Dynan cautions against making too much of the credit’s remarkable timing. “While it’s true that many people who bought in 2009 or 2010 have seen a lot of capital gains on their homes, I think we need to be careful about predicting that things would turn out the same way in a future housing downturn,’’ she said. “A central lesson of the last 15 years is that home prices are really hard to predict, and people should be really careful about betting on them taking some particular path in the future.’’
Indeed, the market looks a lot different today. While those temporary tax credits were intended to spur demand at a time when people were afraid to buy homes, the current housing market is dysfunctional in an almost opposite way. “Today there’s strong demand but not enough supply, and it’s pushing up prices too fast, way above people’s income growth,’’ Yun said. “Therefore, we have a new and different problem, which is the affordability challenge.’’
Yun says increasing supply through new construction would provide the most urgent relief to priced-out home buyers. And while there’s no present-day cousin of the first-time home buyer tax credit that could address the problem, he said the government could still help boost housing inventory by issuing construction loans or reversing a recent tariff placed on Canadian lumber, which has increased the cost of building materials.
At the community level, meanwhile, “Local zoning laws can be very restrictive, too constrictive, and that’s harming affordability,’’ Yun added.
While house hunters now have to contend with sky-high prices without any help from the feds, there’s still other free money floating around for first-time home buyers. In the city of Boston, for example, qualified residents can receive up to 3 percent of their home’s purchase price as down payment or closing cost assistance for a one- or two-unit property; if they stay in the home for 10 years, the “loan’’ is forgiven.
Cambridge, meanwhile, offers similar assistance of up to 6 percent or $10,000, whichever is greater. But more interestingly, it introduced a program called HomeBridge this summer: an attempt to buy down the market price of condos to an affordable level by kicking in up to 50 percent of the purchase price for eligible buyers.
Yes, you read that correctly: Cambridge might pay for up to half of your home if you live or work in the city. The catch, said home buyer coordinator Antonia Finley, is that the unit becomes part of the city’s permanent affordable housing stock — which limits how you can use or sell the property.
Finley said the program’s first round of buyers will close on homes later this year. It’ll be interesting to catch up with them eight or nine years from now.
Jon Gorey blogs about homes at HouseandHammer.com. Send comments to [email protected]. Follow him on Twitter at @jongorey. Subscribe to our free real estate newsletter — our weekly digest on buying, selling, and design — at pages.email.bostonglobe.com/AddressSignUp.
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