Stimulus: Senate Tacks on Home, Auto Incentives

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"Giving incentives [to buy a car or home] won't work if people are worried about losing their jobs or about the value of that asset declining," says Rajeev Dhawan, director of Georgia State University's Robinson College of Business. Senator Charles Grassley (R-Iowa) argued that even if the car incentive proposal worked, it would only increase consumer debt, which is already weighing on the economy.

Critics of the housing program worry that it won't generate enough demand to plug the foreclosure gap—or, if it does, that it will cost much more than $19 billion.

Dhawan says the plan has problems at both the high end and the low end of the housing market. On the higher end, $15,000 represents a drop in the bucket on the purchase of such a large asset that could depreciate significantly more than that. And even if lower-income individuals wanted to buy a home—which is unlikely given the state of the job market and economy—they would have trouble getting loans.

"How are those at the lower end [of the market] going to get financing?" asks Dhawan. "The banks aren't lending."

Cost Estimate Challenged

The credit is unlikely to generate enough demand to halt the tide of foreclosures, says Barbara Sard, director of housing policy for the Center on Budget & Policy Priorities. Using data from the Mortgage Bankers Assn., the Center for Responsible Lending on Feb. 5 estimated that nationwide 46,600 foreclosure proceedings now start every week. Total U.S. foreclosures are expected to reach 2.4 million this year, according to the data.

Others question Senator Isakson's cost estimate for the program. Dean Baker, co-founder of the Center for Economic & Policy Research, a Washington think thank, says that even in a weak housing market this year, it's likely about 5 million homes will be sold. Assuming those individuals qualify for the full credit, the program would cost at least $75 billion. "It seems a total waste of government money for no reason," says Baker.

Senator Isakson contends, though, that a similar plan worked in the 1970s. Amid a housing crisis at that time, Congress passed a $2,000 tax credit for anyone buying a new home for their principal residence. Isakson says it helped reduce housing inventory and stabilize home values.

Herbst is a reporter for BusinessWeek in New York.