I just stumbled over a strong argument in the Washington Post against renewing the first-time home buyers' credit, put forth by the Baseline Scenario blog's Simon Johnson and James Kwak. I've argued in favor of the credit but believe it should remain isolated to first-time buyers. Johnson and Kwak have some valid criticisms, but I think there might still be ways to fix the credit and largely shield it from their worries.
Those Homes Would Have Sold Anyway
They begin with the often-heard complaint that many people claiming the credit would have bought homes anyway. That's true. But I think that the number of people who say they would have bought homes without the credit is highly exaggerated. Think about the current economic environment. Real estate is more unstable than it has been in decades; nearly 10% of Americans are unemployed with many others fearing for their jobs; and many people have lost wealth in real estate holdings and the stock market. Economic conditions aren't exactly conducive to buying a home right now. I think the number of home sales would be far, far lower without some incentive in place. Moreover, keeping the credit to first-time buyers increase the likelihood that it's a sale that might not have otherwise occurred and will reduce housing inventory.
This complaint is also a feature of virtually every kind of stimulus -- there's always overlap. For example, let's say you give states money to hire more teachers. Okay, but some of those teachers might have found jobs anyway and empty job openings will remain that way for longer if no qualified applicants apply. Moreover, you run the risk of hiring more teachers than you need, so once the stimulus money runs out, state governments might choose to cut those unnecessary costs and lay them off again. If you're going to play the stimulus game, then you have to accept some inefficiency.
It Overinflates Housing Prices
They also worry that the tax credit might overly stimulate the housing market, inflating housing prices above their natural level. Given how far home prices have fallen, I find this a little hard to swallow, but let's humor the idea. I think there's a solution that addresses this, and even speaks to the earlier criticism about not spurring only sales that wouldn't have happened anyway.
Neutralizing Negative Sentiment
The reason I think a tax credit like this can be helpful is because it can counteract the wrong kind of human psychology. People have a tendency to panic and overcorrect. That's what caused the financial market's collapse. The problems at most banks were not bad enough to cause them to fail, yet hundreds had to be bailed out by the government when their share prices plummeted and they couldn't secure financing. What happened? People freaked out.
What we don't want in the real estate market is an overcorrection. Housing prices were certainly vastly overvalued in 2006. But undervalued housing prices in 2010 are also bad. A tax credit like this could seek to help swing the pendulum back, without creating absurd irrational exuberance about the real estate market.
A Targeted Credit
So how do you strike the balance of stimulating without overheating? What if the credit were better targeted at the real estate markets that have been hit hardest? For example, the housing market in Northern Virginia has barely been touched by real estate's broader problems. Don't apply the credit there. But what about South Florida? Housing prices in some places there are down 30% -- or more. They're at 1989 levels. Allow the credits there.
Why not target them? Obviously people will complain that this isn't fair to those in good markets, because they can't benefit from the tax credit. But the government has never been in the business of assisting those who need no help. After all, it doesn't give food stamps out to millionaires -- why should it give first-time home buyer tax credits out in healthy real estate markets?
In the worst markets, people will be even less likely to take a risk on real estate. Meanwhile, foreclosures continue as home prices plummet. I think the tax credit specifically applied to such markets will largely dodge Johnson and Kwak's criticisms. Instead, it will work to alleviate the fear and panic that still grip many potential buyers in those regions.
But this applies both ways. If you've lost your job, is a $8000 one-time credit really going to make you buy a home right now? $8000 can help with a down-payment; it shouldn't make a difference if you can't make the monthly payment.
You could just as easily make a case where a better economic situation means that more historical renters would be able to afford to buy if you gave them a sweetener.
I don't think we really know which situation has more people who are $8000 away from buying a home.
Those buyers would havbe bought anyway - eventually. As we saw with the cash for clunkers, buyers jumped into the market maybe a bit earlier than they would have under the current situation sans tax credits. I suspect that, if allowed to lapse, you'll see a marked drop in home contracts over the seasonal drop normally seen in the winter months.
If "those buyers would have bought [the homes] anyway [without the tax credit]" why was there so much inventory on the market?
At the beginning of the "credit crisis", foreclosures were abundant, it's the reason for the deepening of the crisis. As a leading indicator, housing inventories in 2008 were high and increasing with every bank failure, every round of layoffs, and every drop in the stock market.
The tax credit (proposed by a Republican) help drive interest in purchasing homes well AFTER the inventory was high and prices low.
The thought that these homes would've been purchased without the tax credit is incorrect. The market data makes that statement false.
They would have bought them later, as in maybe next year, or maybe two, when they had $8k more to put down, or when buyers came off the price by that amount, or some combination of price reduction, or more financial liquidity for the buyer. Plus, financing was very difficult at the end of 2008 and early 2009.
Buyers are, not to say 'stupid', but not very bright. They'll knock each other down and trample others to get in on the early sales on the Friday after Thanksgiving. The same effect that was seen with the auto gimick will be seen with the housing gimick.
While a different animal in how it operates, it got the same results. Buyers in the door, home closings. I know folks who bought homes that said the $8k (or $7500 depending on when they bought) was what made them want to buy, at that time. That they had been looking, but couldn't seem to get their financial act together. But cash in your pocket, well, that bumped enough buyers into "the here and now" instead of down the road in 2010 or later. Maybe not all the buyers fit that category, but I suspect that enough of them were ones that bought earlier rather than later.
Traditionally in the housing market, the winter months fall off. We'll see in the spring, when housing sales traditionally have picked back up, if they do and by how much. The numbers will tell the tale, but it'll be 9 months to a year before you have good data.
Clearly, in this economy, no one bought a home that didn't need one (at least I hope they didn't), and no one bought a home that wasn't in some stage of being in the market for a home.
Because prices had risen too far in the bubble and people expected that prices would continue to fall. However, that doesn't necessarily mean that artificial action to prop up prices is the right thing to do. The right thing for people who own housing, but for all of us who couldn't afford to buy a home due to the bubble, and sat out the price rise as a result, prices falling to a equilibrium level would be better than keeping them artificially high.
Proposed by a Republican, yes; proposed by a Republican who worked as a real estate agent. Let me suggest that what a real estate agent thinks is good for America might not be good for everyone, even if he honestly thinks so. Just as Wall Street bankers and Treasury secretaries think that what's good for enormous banks is good for America.
They would have been bought eventually, and at some price. The market data in no way contradicts that. The tax credit made some of the houses get bought earlier, and made them get sold at a higher price than they would otherwise.
If you own housing, then you cheer the idea that house prices went up; if you were waiting to buy, then you don't. The tax credit only possibly helped people looking to buy; it definitely helped people who already own.
In general, I oppose tax policies designed explicitly to help the haves against the have-nots, and that's what the homebuyer tax credit does. It's particularly insidious, since it's a policy designed to help the haves but dressed up as though it helps the have-nots.
"What we don't want in the real estate market is an overcorrection. Housing prices were certainly vastly overvalued in 2006. But undervalued housing prices in 2010 are also bad. A tax credit like this could seek to help swing the pendulum back, without creating absurd irrational exuberance about the real estate market."
As someone in the market for a house, I most certainly would like to see an overcorrection. But leaving my selfish preferences aside; I don't think we are anywhere near "overcorrected." Prices are still quite high based on historical affordability trends.
http://www.ritholtz.com/blog/2009/02/us-existing-house-price-median-family-income/
Oops. That is actually a chart from about a year ago. Thought it was from October '09. I'll have to see if I can find something more current. I think prices are still above the 2.5x median income that have historically been used to signal affordability, but I'll have to see if I can find recent data to back this up.
If the recovery is real and housing prices start to rise again, none of this will matter.
If we have turned Japanese and are in for a decade or more of stagnation, then these price supports for real estate are trouble. At best, they are a waste of money. At worst, they make the problem worse. The government support ends at some point, and a whole new crop of buyers is forced underwater as prices resume their drop.
Government support is massive right now -- not just the home buyers credit, but the 80+% of the mortgage market that the agencies are funding or guaranteeing. Without that support, prices would be much lower.
Things aren't exactly rosy in Northern Virginia so cut us a little slack.
Okay, I have seen the craziness first-hand (RE agent)and people have been going nuts trying to meet the deadline... when, if they were in a normal scenario, would have kept on looking.
A house that isn't a short-sale? I'll take it!
Now, if the credit is not extended probably 80% of the pending short-sale contracts sited in the NAR's recent numbers are going to fall apart. Many of those buyers have had pending contracts for 4-5 months and missing the December 1st deadline will be the last straw. Get ready.