Friday, October 23, 2009

MarketWatch: Kill the Credit

MarketWatch Washington bureau chief Rex Nutting argues against renewing the first-time home buyer tax credit:
The tax credit is an extremely ineffective stimulus, and like the TARP, it mainly rewards the very people who got us into this mess. ... Also, the tax credit gets the economic incentives all wrong. ...

The National Association of Realtors says about 2 million new buyers will take advantage of the subsidy this year, but the real-estate lobbying group admits that the vast majority of those buyers would have bought a home without any subsidy.

Most of the subsidy is wasted. ... It's expensive, but the worst thing about the subsidy is that it doesn't address the issue of oversupply, which is the main reason prices have fallen so much.

Most first-time buyers move from renting to owning a house. That subtracts one home from the vacancy list, but adds an apartment. The net change is zero. There is little gain for the economy.

In the second quarter, a record 4.4 million apartments were vacant (a record 10.6% of all units) and there were 1.9 million vacant dwellings that typically were occupied by the owner. The housing problem in America isn't that home prices are falling; it's that there are so many vacancies that prices must fall. Incomes did not rise as fast as home prices did, so many families simply can't afford current prices. The laws of supply and demand have not been repealed. ...

The tax credit is designed so a buyer can use it for a down payment. Combined with another flawed government plan to recreate subprime lending inside the Federal Housing Administration, the tax credit encourages more buyers to put less of their own money down.

The one thing we know about foreclosures is that they are much more likely if the owner has no equity. So the tax credit, which was designed to reduce foreclosures by helping to prop up prices, actually will lead to more defaults as already stretched buyers lose their jobs.
Remember, the first-time home buyer tax credit is costing $43,000 for every extra home sold. That's a massive waste of your money just to transfer an existing home from one person to another.

15 comments:

  1. I too wish they would kill it - only so as not to continue to hear permabear arguments that it is 100% responsible for holding up the 700K-1MM segment of the market in the areas that are doing well.

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  2. "I too wish they would kill it - only so as not to continue to hear permabear arguments that it is 100% responsible for holding up the 700K-1MM segment of the market in the areas that are doing well."

    What are you talking about? Perhaps you meant perma-strawman. The credit is propping up the low end. It is distorting the aggregate numbers for sure, but if you look at the tiered Case-Shiller indexes, that's obviously due to an anomalous bounce in the low end (most likely from the credit).

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  3. I cannot wait until this thing ends and hopefully they'll kill it so I can start looking for a home for my family.

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  4. "What are you talking about? Perhaps you meant perma-strawman. The credit is propping up the low end. It is distorting the aggregate numbers for sure, but if you look at the tiered Case-Shiller indexes, that's obviously due to an anomalous bounce in the low end (most likely from the credit)."

    For starters, the CS tiered indexes (DC) are also showing a bounce on the high end too. Even on a seasonally adjusted basis.

    Thats more of a side issue though. Go over to the nova housing blog and look at the comments from the recent days.

    We have people looking in the 700K-1MM price category who cant understand why sales in the immunozones are holding up.

    Curiously, the people who said the 8K credit "wouldnt do anything" to help that market segment, now seem to think its entirely responsible for the strength in these areas.

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  5. "Go over to the nova housing blog and look at the comments from the recent days.

    ...

    Curiously, the people who said the 8K credit "wouldnt do anything" to help that market segment, now seem to think its entirely responsible for the strength in these areas.
    "

    Did anybody on this blog say both things?

    I started to skim through the nova blog but didn't see what you are talking about (which doesn't mean it's not there, I simply skimmed). I agree that the credit should only be having a tangential effect on the upper end of the market, but maybe those who you thought were arguing that the effect is larger actually weren't saying that. Could it be that you were interpreting complaints about government intervention to mean the tax credit? The Fed is artificially depressing mortgage rates right now which is propping up prices across the board and which is independent of the tax credit.

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  6. low rates, tax credits, arms that havent reset yet...there is a lot at play. Now is NOT the time to buy.

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  7. Who on that blog said it wouldn't do anything? Maybe that remark was taken completely out of context. Like anything positive, in the long run. But the market response is pretty much what most expected.

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  8. Everyone is saying now is not the time to buy. 8k credit, rates in the low 5s, prices down 35%. What else do you want?

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  9. I heard today that they are now starting to investigate the applications, and found a 4 year old recieved $8k for his first house. Now let's see how much other waste is out there.

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  10. The median household income for the DC metro area is about 100k. Historically, the median home price of the DC metro has been a multiple of 2.8 times the median income. After doing the math, you arrive at a median home value of $280,000. However, the current median value of a home in the DC metro area is $388,000. Consequently, if history is to serve as a gauge for values, there is more room for price declines.

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  11. "Everyone is saying now is not the time to buy. 8k credit, rates in the low 5s, prices down 35%. What else do you want?"

    The rates to go back up and the credits can stop, so home prices will drop another 50%.

    Why get a mortgage today at a low interest rate, when you can buy the home outright with cash AFTER the rates go up and the prices drop?

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  12. I hope this means the economy is picking up.

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  13. >The rates to go back up and the
    >credits can stop, so home prices
    >will drop another 50%.

    Maybe there are specific areas that could drop another 50%. But, when I look at the historic charts, drawing a straight line through the normal trend, prices are back to where they would have been if there hadn't been a bubble in the first place.

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  14. via CalculateRisk:
    "Based on Goldman's estimates, the first-time home buyer tax credit probably cost around $80,000 per additional home sold. Ouch."

    And they estimate it artificially boosted prices 5%.

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  15. "Remember, the first-time home buyer tax credit is costing $43,000 for every extra home sold. That's a massive waste of your money just to transfer an existing home from one person to another."

    Call me an optimist, but I don't think you really believe that this simplistic claim was either the intent or outcome of the tax credit. If you're going to add commentary it should include greater depth of thought.

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