Tuesday, January 26, 2010

Housing Sales Slide Shows Flaws In Tax Credits

The biggest December decrease in housing sales on record was a result of the end of the original homebuyer tax-credit which encouraged first time homebuyers to rush to beat the Nov 30th deadline. Moses Kim from discusses why artificially propping up the housing market doesn't work in the long term. See the following post from Expected Returns.

No surprise here. This is just a glimpse of what will happen when the government removes the homebuyer tax-credit permanently. Our government specializes in temporary solutions to long-term structural problems- solutions that make problems worse in the long run. This will end badly, especially since the Federal Reserve has essentially become the sole buyer of toxic waste from Fannie Mae and Freddie Mac. Housing is getting propped up from all directions, and yet there is hardly any effect. This is concerning. From Bloomberg, Existing U.S. Home Sales Decreased More than Forecast:
Sales of existing U.S. homes plunged in December more than anticipated, the month after a government tax credit was originally due to expire.

Purchases decreased 17 percent, the biggest decline since records began in 1968, to a 5.45 million annual rate from 6.54 million pace the prior month, the National Association of Realtors said today in Washington. The median sales price increased for the first time in two years, reflecting fewer first-time buyers, the group said.

First-time buyers rushed to complete deals before the $8,000 government incentive was expected to end on Nov. 30. The subsequent extension and expansion of the credit, together with the one- to two-month delay between contract signings and closings, signals demand will pick up again in the first half of this year.
You don't necessarily want homebuyers, especially first-time homebuyers, rushing to close deals simply to receive a tax credit. The steep decline in home sales immediately after the expected expiration of the tax-credit shows you how artificial the demand for housing in previous months was. This is still a weak housing market- after all, if the housing market were really stabilizing, the government would not have to step in with a tax credit, let alone extend it.

When the dust settles, there will be an army of homeowners who had no business owning a home in the first place. Sound familiar?

Tax Credit Extension- Prolonging the Agony
President Barack Obama and Congress extended the first-time buyer credit to cover deals signed by April 30 and closed by June 30, and expanded it to include current homeowners. Even so, some economists believe the original measure pulled sales forward, restraining demand for a few months.

After rebounding early this year, sales will probably fall off again after June, Yun said in the press conference. The degree of the decline will depend on the state of the job market, he said.

Yun said he was “generally pleased” with the December outcome since he was fearing an even larger drop following the expiration of the tax credit. “There is an increase in home- buyer confidence,” he said, adding “there is some sustainable momentum” in sales. Even with the decline, sales were still up 15 percent from the same month last year, signaling the general improvement, he said.
We might as well just make the tax credit permanent and effectively raise the price of all homes by $8,000. Let's throw more taxpayer money at homebuyers who would have bought homes even without tax credits. After all, we are becoming experts at wasting taxpayer money, why stop now?

There is no recovery in unemployment, which means there will be no recovery in housing. In the context of previous bounces off lows in economic activity, we are experiencing a very weak recovery. This suggests the second dip in our economy will be pretty nasty. Very few sectors of our economy will survive unscathed, and this includes housing.

This post has been republished from Moses Kim's blog, Expected Returns.
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