Vermilion Realty Blog

By Brian Summerfield, Online Editor, REALTOR® Magazine

Amid several news reports that the first-time home buyer tax credit will almost certainly be extended, I’ve seen more than a few blogs and online comments arguing against it. Some of them say the government can’t afford it, and lament the fact that we’re borrowing from our children and grandchildren to pay for this. Others maintain that the tax credit artificially stimulates demand, and the market will resume its slump whenever it does expire. Still others claim that it hasn’t really motivated enough buyers who would not have otherwise purchased a home to justify the program.

I may disagree with some of these arguments, but I’m glad people are making them. It’s essential that we have a healthy debate on this important subject rather than move forward with our eyes closed and our mouths shut.

However, there is one argument that I take issue with: The tax credit and the “Cash for Clunkers” program are essentially the same thing. I’ve read this line of reasoning in a few places, and in each instance, it seems to confuse rather than clarify. It seems to me that the two initiatives are very different in a few significant ways:

• Appreciating vs. Depreciating Assets: Most of the time—and the past couple of years notwithstanding—a home will appreciate in value, whereas an automobile will always depreciate (unless it’s some sort of rare collectible). The tax credit encourages spending on something people can use to build and preserve wealth; Cash for Clunkers does not.
• Capital Flows: One criticism of the Cash for Clunkers program was that the biggest beneficiaries were Japanese auto manufacturers. Six out of top 10 vehicles purchased through Cash for Clunkers were Japanese (Toyota alone accounted for nearly 20 percent of all sales), yet all of the top 10 cars traded in were manufactured by American companies. With the tax credit, much more of the money remains in the U.S. economy.
• Distribution: The Cash for Clunkers program was a credit at the point of sale, meaning if you traded in your car for one with better mileage, you got an amount somewhere between $3,500-4,500 knocked off the price, depending on fuel efficiency. Although the tax credit can be—and has been—monetized up front in many instances to help with closing costs and down payments, it’s structured to be doled out the following year as a refund.
• Target: In the case of Cash for Clunkers, the aim was to boost sales of a certain kind of product: new cars that get good mileage. With the tax credit, the goal is to encourage a certain kind of consumer: the first-time home buyer. The distinction is important because the latter should have a greater and more enduring impact on the economy.

I understand why people are skeptical about whether the tax credit extension will produce the desired outcome and how it will be financed. But to me, the tax-credit-is-the-same-as-Cash-for-Clunkers argument falls flat, and isn’t helping people make their case.