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posted on 27 July 2015

Why Taking The 2009 Homebuyer Tax Credits Might Have Made You Worse Off

by Zillow

Beginning in 2008 and continuing into 2010, Uncle Sam gave a federal tax break to millions of eligible homebuyers as a means of goosing demand for homes during the worst of the Great Recession. But was it actually a good idea to take the money and jump into homeownership in 2009, or would those millions of buyers have been better off renting and investing their savings instead?

That depends on how many risks you're willing to take. For all but the most extremely risk-averse, buying in 2009 was probably a bad idea.

When deciding whether to buy a home, a necessary consideration involves determining what you might do instead. Buying a home involves saving a lot of money for a down payment and the costs associated with a purchase, which is money that could be spent on any number of other things. And if you're not buying a home, you're very likely renting one. Typically, homeowners enjoy some growth in home equity over time, which can offset many of the costs of owning. Similarly, returns from alternate investments can often help offset the costs of renting.

If you're renting instead of buying, what you do with those savings you otherwise would have spent on a home, and/or any additional savings you may realize by paying less in rent than you might on a mortgage, taxes and maintenance, can make a big difference in financial outcomes. For individuals willing to play the stock market, buying in 2009 was a big mistake, financially - with or without having taken Uncle Sam's money.

Let's suppose the Homebuyer Tax Credit did not exist. If you bought the nation's median-priced home in 2009, instead of renting and investing your savings in the S&P 500, by 2015 you would be $19,132 worse off as an owner than as a renter [i]. Assuming you took the maximum-available $8,000 tax credit when buying in 2009, you'd be worse off by "only" $11,132.

The Homebuyer Tax Credit alone was not enough to make buying a home in 2009 a good financial decision for the average American, for a number of reasons. For one, home values kept falling in many areas for roughly three more years before bottoming out, making it difficult for home equity alone to grow sufficiently to offset ownership costs. Also, beginning in roughly 2009, stock markets really began to recover in earnest and take off, rewarding those who invested instead of buying.

But hey, as they say, hindsight is twenty-twenty. If you bought a home in 2009 that you otherwise may not have been able to afford (either because home values were lower then or because of Uncle Sam's $8,000 nudge), and you love it, and you're happily still there today, congratulations. A strong stock portfolio can do a lot for you, but you can't live in it.

As a twist, let's say that you hadn't invested in stocks, because you're not a risk-taking kind of gal. Instead, you kept your savings in a savings account, or invested in Treasury Bonds (which since 2009 have yielded so little, it's essentially equivalent to parking your money in savings). As a homeowner, the share of your mortgage payment devoted to paying off the principal is similar to putting money in the bank (unlike the interest paid on your mortgage, which is simply paying the bank). So any growth in home values and subsequent equity earned is similar to earning a return on an investment that you otherwise wouldn't make.

When you pay rent, that money is essentially paid and gone forever. But money saved and invested in Treasury Bonds and savings accounts, even while earning a return similar to a mattress stuffed with cash, is at least money not thrown away. Even so, for this safety-first buyer, 2009 was not a great time to buy without having taken the max Homebuyer Tax Credit. Without $8,000 from Uncle Sam, you would be $2,036 worse off for having purchased your home in 2009 instead of renting and putting your money in a low-yield savings account or bonds (or, again, basically under your mattress).

BUT, if you were extremely risk averse, qualified for and received the max Homebuyer Tax Credit, well, 2009 wasn't all bad. Under our assumptions, you'd be better off today by $5,964 having bought in 2009 instead of renting and not investing. Good for you, Safety Sue.

[i] Our methodology and a full list of all our assumptions can be found here: http://www.zillow.com/research/q12015-breakeven-horizon-since-2000-10088/

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