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TitleFAQ: Affordability index and 2008 home buyer tax credit
AuthorKarl Zandi
Question

Does the Moody's Economy.com housing affordability index incorporate the impact of the 2008 first-time home buyer tax credit?

Answer

No. The Moody's Economy.com estimate of housing affordability (RHXAFFQ) does not incorporate the impact of the tax credit for first-time home buyers, enacted in 2008-2009 as a reaction to the recession.

There are two primary drivers to our housing affordability index: our estimate of median existing home prices (RHX1MEDQ) and our estimate of median family income (RYFMMEDQ).  Neither is directly impacted by the tax credit.  (For full details regarding these two estimates, please consult Mnemonic 411.)

Our estimate of median family income is primarily derived from the Census Bureau's annual American Community Survey (ACS), and post-2008 incorporates personal income data from the U.S. Bureau of Economic Analysis (BEA).  The BEA figures, in turn, do not incorporate the tax credit.

From the BEA:

The first-time home buyer tax credits are not included in transfer payments.  In the national account statistics, these tax credits impact federal income tax receipts and capital transfers paid by the federal government to households.

The first-time home buyer tax credit was first established by the Housing and Economic Recovery Act of 2008 (HERA).  The tax credits were initially interest-free loans to first-time home buyers for home purchases between 4/8/08 and 6/30/09.  The loan amount, for 10% of the purchase price of the home up to a maximum of $7500, could be claimed by the home buyer as a federal income tax credit and paid back through increased income tax liabilities over the following 15 years.  We treated the outlays associated with this program as deferments of current income tax liabilities rather than as true expenditures.  This treatment resulted in a reduction in our estimates of income tax receipts in 2009.

The tax credit program was modified by the American Recovery and Reinvestment Act of 2009 (ARRA).  For purchases made after 1/1/2009, the interest-free loan was converted into a true tax credit that would not need to be repaid.  The maximum credit amount was also increased to $8000, and the applicable period for home purchases was extended to 12/1/2009. We are treating outlays associated with this modified program as capital transfers paid by the federal government to households.



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