The Macroeconomic Effects of Housing Stimulus

We estimate the effect of the 2009 and 2010 First Time Homebuyers Tax Credit program on house purchases and prices using variation across local geographies in ex ante exposure to the program. Using data from individual income tax returns, we measure a local area's exposure by the fraction of the population that was eligible for the credit. We combine this measure with tax return data from the program window to confirm that places with higher ex ante exposure saw more people claim the credit. Using this instrument and a difference-in-differences design, we present three findings. First, the program induced a cumulative increase in home purchases in high exposure counties nearly double that of low exposure counties. The extension of the program in December 2009 and expiration in June 2010 allow us to rule out omitted variable concerns. Second, high exposure areas see house prices grow by 4% cumulatively relative to low exposure areas. This pattern is persistent and not driven by pre-policy trends. Third, we find little evidence of a sharp reversal in the post period; instead, demand appears to come from several years in the future. To show this, we construct counterfactual samples of first time homebuyers in years prior to the credit. Relative to these samples, those who claim the credit are on average three years younger, less likely to be married, and richer. We combine our estimates with a simple model of intertemporal choice in timing durable goods purchases. The implied interest rate elasticity of demand, a key parameter in macroeconomic models of monetary policy, is substantial. Estimates from the literature of house price externalities imply that the value of the program likely exceeded its cost.