Just a quick blurb...

...about the new home buyers $6500 tax credit. First and foremost, it shows that the Democrats concede that tax cuts can stimulate an economy, but that notwithstanding, it is not the greatest idea, and it will not stimulate the housing market long term. All you have to do is know how people think and work to understand that.

And this is the downfall of many economic thinkers - they fail to see the ramifications of how people react to changing situations. All economic systems have people at their heart, and people do interesting (and, at times, predictable) things. Having this tax credit for new and repeat home buyers (that was added in the last extension, with some wording to head off people buying investment property) expire on May 1st shifts the dynamics of the real estate market. Of course people are clamoring to buy right now - there is a huge incentive. Remember, this is a tax credit, not a write-off... the $6500 comes off of what you owe, not off of your income to calculate what you owe, which means that many people will be getting $6500 more on their tax returns.

But that sounds great, you say, and I say "Nay, nay". The problem is multifaceted now. You have shifted the buying trend, so don't be shocked if the summer (a traditionally good time in real estate) has a sharp decline in sales - people shifted their buying window forward slightly, this did not mean that more people necessarily are buying homes, and it did not make those homes more affordable. In fact, given the stringent lending requirements now, I would warrant that only upper-middle class to wealthy people can cash in on this credit. It might help some in the middle class, but it certainly does not make the homes more affordable to the poor (this is just an impression - I do not have the stats to back it up, but it seems to make logical sense - not that this program really is targeting the poor, I believe it is intended to help the middle class, but my impression is that it will only help the upper-middle to upper class groups).

Also, this will artificially boost home prices - people are fighting to get into homes and get them closed by the end of May (the closing deadline in the law). All that this will do is artificially inflate home prices and cause a "mini-bubble" in price. Again, don't be surprised to see home values fall (slightly) the two quarters after the program ends. Of course, the government could continue the program, but that still delays the inevitable and tries to artificially prop up home values.

Of course, this ultimately hurts the consumer, the lender, and the market. With values artificially high, more people will get into the homes at an inflated price and be shocked when the value falls. Lenders will have assets that do not match the values (not as big a concern because they are doing less "sub-prime" lending (sub-prime refers to the credit of the borrower, not the type of loan - "sub-prime" borrowers have credit that makes them a risky investment for the bank)), and if someone forecloses, the banks are stuck with a home that does not match the value of the loan that it made. Of course, the market suffers because the manipulations by the government will (and are) cause large fluctuations in the market, leaving investors, buyers, and sellers in a state of shock.

The best thing the government could do is to stay out of housing, let the home values correct on their own (of course, this doesn't account for the other silly program forbidding banks from foreclosing on properties until it is verified that the homeowners don't qualify for federal assistance - that won't hurt a bank's liquidity or willingness to loan money, will it? (note heavy sarcasm)), and allow the consumers who have been smart with their money to benefit, rather than bailing out people who have foolishly flung money down a rat hole.

Of course, this means that some people will be upside-down in their loans, but why is that a problem. Long term the value will go up and correct, but even if it doesn't you ultimately own an asset, free and clear. If you paid too much, too bad. You will be paying far more than the value of the home in interest anyway, and nobody makes noise about that (which is essentially the same phenomenon - paying more than the value of the property). And why isn't anyone up-in-arms about being upside-down in their car loan? You are upside-down in that the moment you drive off the lot. Shouldn't we have a federal program to rectify that? What if I wreck my car and I am not as lucky as Supergoober? Shouldn't the rest of you bail me out?

Of course not, but we have sentimentality (understandably so) attached to home-ownership. The fact is, however, that even with this sentimentality, we can incentivize home-ownership without destroying the market. Give the tax write-off that we currently get and the market will (ultimately) do just fine. If you want lower-middle class (and lower income) people to own property, federal subsidies will work, but you must make sure that the subsidy is not in the form of a loan that the person can never pay back and that there is still the perception that the person is spending a significant amount of his/her own money to purchase the residence (to instill pride in ownership - if that is lacking, well, that is another blog, now isn't it?). trying to get everyone to own is foolish, our system is supposed to guarantee opportunity, not outcome - that can never be guaranteed (see the next blog). And yes, we should work to provide people with opportunities, but people have to fend for themselves and deal with the consequences of being a living agent with free will. Sorry, but life is not perfect, nor will it ever be.