Stimulating Housing Markets

This paper studies temporary policy incentives designed to address capital overhang by inducing asset demand from buyers in the private market. Using variation across local geographies in ex ante program exposure and a difference-in-differences design, we find that the First-Time Homebuyer Credit induced a cumulative increase in home sales of 397 to 546 thousand, or 7.8 to 10.7 percent, nationally. We find little evidence of a sharp reversal of the policy response; instead, demand comes from several years in the future. The program likely sped the process of reallocating homes from distressed sellers to high value buyers, which stabilized house prices. The response is concentrated in the existing home sales market, implying the stimulative effects of the program were less important than its role in accelerating reallocation. ∗We thank Andrew Abel, Jediphi Cabal, Paul Goldsmith-Pinkham, Erik Hurst, Anil Kashyap, Ben Keys, Adam Looney, Matt Notowidigdo, Christopher Palmer, Jonathan Parker, Amit Seru, Isaac Sorkin, Johannes Stroebel, Amir Sufi, Joe Vavra, Rob Vishny, Owen Zidar and seminar and conference participants for comments, ideas, and help with data. Tianfang Cui, Prab Upadrashta, and Iris Song provided excellent research assistance. The views expressed here are ours and do not necessarily reflect those of the US Treasury Office of Tax Analysis, nor the IRS Office of Research, Analysis and Statistics. Zwick gratefully acknowledges financial support from the Neubauer Family Foundation, Initiative on Global Markets, and Booth School of Business at the University of Chicago.