Who is going to get the benefit if the homebuyer tax credit passes?

Who is REALLY going to benefit if the proposed new tax credit for homebuyers goes through?

Will it be the buyers of new homes? Or the sellers of such homes?

Economist use the term "tax incidence analysis" to describe such questions.

It's important to distinguish between the STATUTORY incidence of a tax credit (who actually receives the check from the government, the buyer in this case) from the TRUE ECONOMIC incidence of the tax credit.

Consider an easy case: Mr. B has signed a contract agreeing to buy a home from Mr. S for $150,000. At the time they signed the contract, let's say that nobody had any idea that Congress would enact this tax credit. However, as is usual, there's often an extended time between the date the contract agreeing to purchase is signed and the date that the house actually changes hands (at an event called the "closing," where lots of papers get signed by the buyer, the seller, and the mortgage bank's representative and the seller actually hands over the keys). That's because it takes time for the buyer to apply and be approved for a mortgage, for a title search to be done to make sure that the seller actually has clear title to sell the property, etc. This can easily take a couple of months, and sometimes more if there are complications. Suppose that Congress enacts a special $15,000 tax credit for homebuyers during the period between the signing of the contract and the actual closing. Suppose further that the tax credit goes into effect before the closing takes place.

In that easy case, the effective economic incidence of the tax credit would be exactly the same as the statutory incidence. Mr. B would pay $150,000 to Mr. A and would get a check from the government for $15,000 included in his refund, effectively reducing his net price for the house to $135,000. (We'll leave aside issues of refundability.) Because the contract price was set before anyone knew the tax credit would go into effect, the tax credit is "pure gravy" for the buyer.

The harder case: Once everyone on both sides of the market knows about the credit, that is going to influence changes in behavior that will affect housing prices for purchase contracts signed after everyone knows about the credit. Presumably the new tax credit will bring some new buyers into the market who would not otherwise have been houseshopping. Similarly, some new sellers may be induced to put their homes on the market. A house that might have sold for $150,000 before anyone knew a credit went into effect might rise in price to $155,000, which means that the effective tax credit incidence would go 1/3 to the home seller and 2/3 to the home buyer. The seller will receive $5,000 more than he would have before, and the buyer will pay (net of the credit) $10,000 less than he woud have before the credit was enacted.

What determines how much home prices will rise?

Elasticity of supply and demand! If one side of the market is very elastic and the other side is very inelastic, the inelastic side will get the lion's share of the value of the tax credit.

If buyers flood into the market and sellers don't respond by increasing the supply of homes on the market, one would expect that houses would get bid up by close to the full $15,000. (Or possibly even more than $15,000 is some sort of bubble mania/expectations takes hold.)

On the other hand, if sellers decide to flood a bunch of homes onto the market because of the tax credit hoopla, but most buyers remain on the sidelines, then it's possible that contract home prices might stay put at $150,000 and the full value of the credit might continue to accrue to the buyers. (It's even possible to tell a story in which buyers start to freak out when they notice that even the tax credit isn't stimulating the market and contract prices could fall below $150,000.)

It's easy to draw supply and demand curves to illustrate all the different possible scenarios.

What's NOT easy is to come up with reliable estimates of elasticity of supply and demand in a case like this one.

Furthermore, there are many other parties that could potentially get part of the value of the tax credit, when you consider all the ancillary markets involved. The tax credit will affect the market for the services of real estate agents, mortgage bankers, real estate attorneys, builders, construction workers, etc.

On top of all of this, it's clear that markets are not clearing right now, so the use of conventional supply/demand equilibrium models are problematic. There's a lot of excess supply of homes, a lot of idle labor and a lot of idle capital.

It all adds up to a lot of uncertainty. We don't really know who will ultimately get the benefits of the tax credit.