Builders: Give Home Buyers a Tax Credit

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Keeping Prices Artificially High

But is it up to U.S. taxpayers to stop the slide? Tomasz Piskorski, an assistant professor at Columbia Business School, calls the tax-credit proposal "an implicit subsidy to homebuilders" that would keep home prices artificially high when they probably ought to be falling. If builders and sellers would drop their prices, houses would start to move again, he said. A tax credit might briefly prop up the market but ultimately may just prolong the agony until real demand and supply find equilibrium.

"Let home prices fall to a level where they become really affordable," he said. "Once the prices are sufficiently low, there will be no problem selling homes, there will be no problem getting decent mortgages. Maybe it's better that home prices fall faster."

Of course, the government already subsidizes home ownership in numerous ways, to the chagrin of economists like Laurence Kotlikoff at Boston University. He calls the subsidies "distortionary." Unlike homeowners in many other countries, Americans can take advantage of substantial tax deductions on mortgage interest. The yearly tax savings from the mortgage-interest tax deduction on a $300,000 home would come to about $4,300, for instance, assuming the home buyer put 20% down, took out a 30-year, fixed-rate mortgage at 5.98%, and was in the 25% income tax bracket.

Uncle Sam's Helping Hand

The government also encourages home buying through oufits like Fannie Mae (FNM) and Freddie Mac (FRE), as well as the FHA, which attempt to expand the market for housing credit. Government regulators pressure banks to make affordable loans available to home buyers.

"There's already a very large government presence everyplace around financing housing," said Alex Pollock, a resident fellow at the American Enterprise Institute in Washington who opposes the tax credits. Pollock said the mortgage deduction in particular "encourages you to buy a bigger house and spend more money."

The problem for homebuilders is that few people are buying much of anything today, and builders say they can't cut prices much more than they already have. Toll Brothers has begun offering incentives to home buyers in distressed markets. Some developers have gone to even greater lengths: In Escondido, Calif., just north of San Diego, Michael Crews Development is offering buyers a buy-one-house, get-one-free deal.

"I think homebuilders have been lowering prices to the point where they are just trying to recapture some of the land costs," Toll said.

Salzman is an intern at BusinessWeek.