It looks like the debate is heating up about whether to keep the $8,000 first-time home buyer's credit that expires at the end of November. I got press release e-mails today from Senate Banking Committee Chairman Christopher Dodd (D-CT) and Treasury Secretary Timothy Geithner both praising the credit's extension. I support the giving the credit a longer life, because I think that if the government is determined to continue to stimulate the economy, then shrinking the vast inventory of houses is a good way to help stabilize the real estate market. But oddly, a home buyer's credit extension might be opened up to far more than just first-time buyers.
Here's the bullet point from Dodd's e-mail that explains. His new agreement:
Extends the $8,000 first time Homebuyers Tax Credit and creates a new $6,500 tax credit for homeowners buying a new home from December 1, 2009 to April 30, 2010.
As you can see, the extension seeks to add a new credit for current homeowners. Dodd's press release explains that more than 70% of existing homeowners would be eligible for the new credit. I am trying to understand the motivation here.
There is a legitimate reason why it's a good thing for first-time home buyers to have an incentive to purchase a home: that will lower the inventory of empty homes. Since this population hadn't owned a home before, it will leave rentals. That necessarily decreases the inventory of houses for sale in the market.
Yet, this new $6,500 credit for current homeowners is inventory neutral. Current homeowners would have to sell their old houses to use this credit to buy new ones. What's the point?
Extend the old credit, yes. But let's not get carried away, throwing money at people to buy houses with no economic benefit.
If this happens, I'll be willing to lay money on this "temporary" credit eventually being made permanent. It's the new deductibility of mortgage interest!
The motivation is to raise housing prices. I don't think it's a good motivation at all, but it's the only obvious one.
if new homes sell then don't you think builders will build more homes putting contractors and sub contractors back to work? Can't you see how that would benefit the economy. Jobs are what are needed to fix this mess.
First, if new homes sell to people who already have homes, then they'll sell their old homes and the supply will be unchanged. Unless you favor extending the credit only to people who are buying a second home and keeping the first, or favor requiring the old home to be destroyed to qualify for the credit.
In any case, it doesn't benefit the economy to build more if we have too many houses. If we have too many houses already, then at least have the builders build something else that we could use. If we have too many houses already, then
Any jobs? Would you favor paying people to build a house and then paying people to immediately demolish it? If not, how is that different from building homes when we already have too many?
Let's see -- first I (and my fellow taxpayers and my children -- born and unborn) have to help everyone buy a car. Then we are asked to help everyone buy a home. When is it our turn?
By propping up house prices, these programs are making it impossible for the government to stop tinkering with the housing market. As soon as these programs stop, housing will start to drop again, and the financial system will take a hit. More existing homeowners go under water and panic. So it become politically impossible to stop these programs.
If you are an optimist, you think of this as temporary intervention -- keep the house prices from crashing, wait for the economy to recover, and prices will start to rise naturally. Then the government can pull back. Same argument as the rest of the stimulus, basically. However, it requires you to assume that our previous debt-fueled economy was "normal", and that we need all these houses.
If you are a pessimist, you think this is a waste of money that just makes the damage worse when the government is eventually forced to stop. All you are left with is more overpriced housing, and lots of government debt.
And if you are a cynic, you think that they deliberately enact these programs to make another part of the economy dependent on government handouts, to the greater glory of Congressmen and unelected bureaucrats. I'm not quite that cynical, but I do think that's the effect, if not the intention.
The problem isn't too many houses.
The problem is that houses are too expensive. The price run up of 2001-2007 was unprecedented amd fueled by cheap credit, not rising incomes. The housing market won't return to normal until prices drop to a level that is affordable at today's income / credit levels. Depending on the local market, that may be another 30% drop.
While Government price supports intend to help specific people, they wind up hurting everyone by delaying the return to normal housing market.
It's sort of a half assed version of the NIRA from the depression.
I probably could see a loosening of the rules for the "haven't owned a home in 3 years" bit. Someone who was forclosed on, might, be able to buy again, if they had a small boost.
But as JoshinHB said, home prices need to come down more before they could buy it on their own.
Maybe.
It's probably currently down to a "downpayment assistance" type program to help folks come up with that 20% down lenders want you to have. Which is what they should have been doing all along instead of 110%+ financing, nothing down, no payments till 2020, buy it, live in it, and pay for it when you sell it mentality.