Calculated Risk says there is a deal (bullet points are from his post):
- Income eligibility for first-time home buyers stays at $75,000 for individuals, and $150,000 for couples.
- For move-up buyers, income eligibility is $125,000 for individuals and $250,000 for couples.
- There is a minimum 5 year residency requirement – in their current home – for move-up home buyers.
- The tax credit is the lesser of $7,290 or 10% of the purchase price.
- The credit runs from Dec. 1, 2009 to April 30, 2010, with an additional 60 day period to close escrow. (So end of April to sign contract, end of June to close escrow)
- Expect bill to be signed by Friday, packaged with the unemployment benefit extension.
So my wife and I fit under the $250,000 couples limit. We’ve lived in our house for eight years. So now the government is willing to give me $7,000 to buy a new house? That would be a sale that wouldn’t have happened otherwise — but what good would it do the economy?
As I tried to explain previously, an $8,000 credit for first-time homebuyers will raise prices by less than $8,000 (leaving aside the effect of leverage for simplicity), because demand at any price point only goes up for first-time homebuyers, not all homebuyers. That means that the buyer gets a fair chunk of the subsidy. But vastly expanding eligibility like this (about 67% of households own houses, and probably about half of them have been in the same house for five years) increases the amount by which prices will go up, which lowers the buyer’s share of the subsidy and increases the seller’s share.
By James Kwak
The Baseline Scenario 
So I guess in order to be a move up buyer, you have to buy a house that costs more than the house you’re selling. The house you sell goes up by $7,000 and you have to pay $7,000 more for the house you buy. It seems like this will primarily help those who are either underwater or close to underwater on their existing home and need help coming up with a down payment on their new home. Them and of course the banks selling REO, mortgage industry, and real estate industry.
less than $8,000 (leaving aside the effect of leverage for simplicity)
That’s like leaving aside gravity when calculating the path of a projectile! And note that prices are set at the margins. The price of a home is the amount that the *most foolish* person can get a loan for.
The tax credit, like almost all government programs in the long run, is a subsidy for the producer or owner of goods, not the consumers. See student loans and the cost of higher education.
Given this, the credit is mostly a wealth transfer from young people entering the housing market to old people who already own houses. That is a transfer from (of necessity) high-consumption young families to a terrified boomer cohort that is saving everything it can. It is horrific economics, but predictable politics.
Cheers,
Carson
“That’s like leaving aside gravity when calculating the path of a projectile!”
Precisely my thoughts. Maximum leverage defines the market (as proven by subprime 100% LTV and the subsequent collapse) and all this does is encourage the lowest common denominator to extend themselves further into debt.
The impact on the low end of the market is disturbing. The credit inflates low-end (sub-$80k) prices by more than $7,280/$8,000 and high-end (over $250k) prices by less. Once this applies to move-up buyers as well, we’re talking about a $15,000 subsidy to encourage real estate transactions.
What isn’t being talked about is what this new tax credit is really designed to do. Once legacy loans are removed from the books of private lenders and insurers, these new loans will be over-leveraged GSE-insured loans. They are simply moving risk to the taxpayer’s balance sheet at the taxpayer’s expense. It is flat out criminal, but existing home owners will turn the cheek since they believe that they are being indirectly rewarded.
A more favorably-calculated subsidy (from my perspective) would be a large credit for first-time buyers and zero credit for move-uppers. Then I, selling my first home, would get a premium that probably would not be factored into the price of the move-up home I would like to buy (which presumably would be beyond the reach or interests of a first-timer, even with the credit). I’m thinking here of narrowing the price differential between a 3-BR, 2-BA and a 5-BR, 3-BA – a change that might please many mid-career professionals.
This homebuyer tax credit does nothing to help first time homebuyers. And it does very little for the U.S. economy long-term. We can see that in the current numbers.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aMVcpTaWgpJI
If the U.S. congress really wanted to help the hard-working blue collar people out here they wouldn’t pass tax credits that benefit people who ALREADY own homes. If the U.S. congress really cared about the hard-working people they would have passed the Mortgage Reduction bill back on April 30, 2009.
http://articles.latimes.com/2009/may/01/business/fi-cramdown1
These tax credits benefit these people: People currently SELLING homes (home sellers), Realtors and bankers (who pocket the fees and commissions) , and congressmen looking for under the table deals and campaign funds.
The tax credits do not help the American family trying to get back on its feet. Useless.
The problem I have is the same I mentioned about this yesterday. If this is a Koosian recession, our first priority is to repair the balance sheets of over-leveraged agents.
The thing is, over-leveraged agents are far more likely to be sellers than buyers. Anything that raises prices, therefore, is going to help repair balance sheets on net. You can complain all you want that the undeserving banks get a slew of new customers (as well as some stabilization in the value of their mortage-backed assets), but its hard for me to condemn this outcome when the banks really do need (still) recapitalization.
Its too much to say that this is win-win, but our priority should still be in short-term stabilization (at least until there’s some concrete evidence of sustainable growth).
I personally think this is a big reason for the stabilization in the Case-Shiller Index. At some point we will need it to drop again, but later, when the economy can handle it.
“its hard for me to condemn this outcome when the banks really do need (still) recapitalization”
Appalling. Banks aren’t getting capitalization anymore, that was the TARP gift fund. A bank that needs capitalization is insolvent. What is your definition of a depository institution if they aren’t expected to have capital to honor deposits? That’s the primary purpose of a bank, or at least it was before the birth of reserve banking and the ending of Glass-Steagall. Now the common perception is that banks need capital to fund their speculative activities… amazing.
Now that everyone is bailout-averse, they are getting asset inflation instead of re-capitalized.
Everyone is re-inflating asset bubbles to save the banks from the calamity of everyone knowing they are truly insolvent and bankrupt institutions. Banks will continuously rise and fall with global faith in the debt system. Debt is costly now because TBTF is hoarding interest-free capital.
The government and Fed are directly funding the asset migration through MBS purchases, GSE insured loans, mod programs, and tax credits. There is no sane justification for it unless you naively believe that asset bubbles are a necessary component of a healthy economy.
I generally support bse here, even though I know his views are unpopular.
Let me phrase the question to those who are railing against anything and everything the federal government does:
Would you rather have a tax credit that (at least partly) goes to buyers/sellers and thereby supports home prices (thus reducing defaults and evictions by allowing leveraged agents to escape, helping support the municipal tax bases without tax rate increases, and helping avoid deflation)?
OR
Would you rather that we permit asset price deflation to continue unabated – meaning that we encourage more mortgage defaults, job losses, etc., and that rather than subsidize home buyers/sellers, we instead focus our efforts on pouring money into banks to cover loan losses?
I am surprised to see Baseline taking a position that is essentially Deflationist at a time when we’re still seeing disinflation. My primary critique of the program aligns with my critique of the current budget deficit – more of it should be funded with money that is printed, rather than money that is borrowed and repaid by future generations.
BTW, why do I get a sense of deja vu? Perhaps because at precisely this time last year we were all debating whether to “fix” banks by supporting housing prices (“bailing out” those irresponsible home buyers) or by bailing out banks directly. Per Secretary Paulson, we decided that bank recapitalization via TARP was the way to go.
And where did that get us?
Please define asset bubble, and how this differs from monetary action to effect price supports.
I suggest, btw, reading up on 1930 and 1937.
“Would you rather that we permit asset price deflation to continue unabated – meaning that we encourage more mortgage defaults, job losses, etc., and that rather than subsidize home buyers/sellers, we instead focus our efforts on pouring money into banks to cover loan losses?”
Did you get that line from the Fed handbook?
How about options 3, 4, etc.
Permitting asset deflation to continue unabated means bankrupt institutions should be allowed to fail and any institution that needs government assistance should be broken up ASAP to further diversify the financial services industry (NOT CONSOLIDATE INTO TBTF INSTITUTIONS). At the end of 2008, the FDIC insured about $4 trillion of deposits. Unless you’re arguing that the government can’t “print” that amount of money (which they already have), then what is the true risk to the American taxpayer of a financial system collapse?
The real risk lies in the international derivatives market, not direct risk to the taxpayer. Stop attempting to justify the current policy decisions as anything related to the well being of the common man.
Any efforts to prevent a return to equilibrium will simply result in another distorted economy and the inevitable crash down the line. The socialization of losses and privatization of gains has ZERO BENEFIT TO THE TAXPAYER. Until this country reduces its public and household debt exposure, this is a road to nowhere.
Also realize that these policies will not put an end to true deflation. Asset inflation does not override the effects of monetary deflation and the base money in this global economy is credit, not U.S. dollars. Credit is contracting at a pace not seen since the 1930’s, so maybe the Fed should focus on that data point instead of CPI. This “bailout” is a balance sheet bailout that does nothing to fix the underlying economic problems. Only when the balance sheets return to normal and the bubbles have been re-inflated will the next phase of the crisis begin.
The common man should be cringing at the sight of higher Dow, S&P, and commodity prices…. but instead the general consensus is of cheer. How twisted a web we weave.
Asset bubble in this sense meaning assets priced at levels not supported by the underlying fundamentals.
House prices increasing during a period of decreasing employment and wages = asset bubble waiting to happen
This tax credit doesn’t really support prices directly. What it does is increase liquidity in the housing market by creating an incentive for transactions. It’s actually not much different than something like rebate trading where a trader is rewarded by the ECN through a subsidy for buying above the ask and/or selling below the bid. The reason this results in elevated prices in housing is because there are multiple bids per asset, but only one ask. Thus in a frenzy to get subsidized, bids run well past the ask price level and a new market price level is reached.
HomeEconomics, well said. I am going to visit this website more often, hoping that you comment frequently.
I think the tax credit does what it’s supposed to do. I’m closing on a home November 20th, and I’m going to use the tax credit money to pay off my credit card. So soon that $200 CC payment will go to stimulate the economy. And the home I am buying did not increase in price by $8,000. I’m actually getting a pretty good deal.
From a Realtor’s perspective, there is some pent up demand. This might cause some buyers/sellers to get off the fence and begin an upward trend in the market. A more likely scenario is a short term increase and a postponement of a true rebound. Hopefully I am wrong.
On the one hand, you are basically arguing for Liquidationism:
http://krugman.blogs.nytimes.com/2009/06/16/the-return-of-liquidationism/
Or, perhaps, better stated as the “Treasury View” from the British Excheq in the early 30s.
http://en.wikipedia.org/wiki/Treasury_View
This can essentially be summarized as:
“We should do nothing, because nothing can be done. Assets will deflate, and that’s a good thing, so that everyone can go bankrupt and debt will be liquidated and we can start creating new credit from scratch.”
Welcome to the logic of the Great Depression, which _sounds_ ever so appealing and fair and just. I will call this the “moralistic” argument, because it is certainly not moral.
You write: “bankrupt institutions should be allowed to fail and any institution that needs government assistance should be broken up ASAP”
Tell me, when those institutions are broken up (as the economy implodes and unemployment spikes to 15%, which one can argue is already happening), WHERE does the money come from to cover FDIC obligations? Banks surely don’t have it – it comes from the taxpayers.
Do you seriously think it’s less expensive to pay for foreclosures/mortgage defaults than to support asset prices and prevent foreclosures in the first place? The only real argument for what you are describing is the punitive one.
But then later you argue “Credit is contracting at a pace not seen since the 1930’s, so maybe the Fed should focus on that data point instead of CPI.”
So which is it? Deflation? Or monetary expansion? (And note that the _Fed_ doesn’t write fiscal policy; Congress does.)
Regarding “printing” money, you are making a classic error that any monetarist (which you seem to be) should avoid. Price levels reflect the expected _permanent_ supply of money. If the Fed creates 4 trillion, but then insists that it’s going to soak up that money just as soon as it can (and maybe even before there is a firm recovery, just to be sure) this sends no credible signal of real monetary expansion.
The result? The markets arbitrage away the “temporary” money, and there’s virtually no impact.
Unless the Fed is going to try to reverse the collapse in velocity (which is concomitant with deleveraging) – which means reflating a credit bubble to support prices – then it needs to either accept a massive asset price decrease or create more _permanent_ money. But we’ve already HAD a price decrease in housing on the order of 30%, and what is currently driving house price declines is NOT popping bubbles – that phase of the bust has passed.
Finally, the most recent housing price drops reflect HUGE CAPACITY UTILIZATION declines, not further bubble-bursting. As Calculated Risk notes, _unemployment_ is driving house price declines, and that is _not_ a good thing. The fundamental question is whether it is better for the government to stabilize prices (to improve unemployment) or to provide jobs directly (to stabilize prices). That’s Keynes vs. the Monetarists, in thirty-one flavors.
As far as supporting prices goes, a homebuyer’s credit that is funded with printed money is IMO a better way to inject new money into the economy than giving it to banks (by paying interest on reserves, or buying assets at inflated prices, or high rate spreads).
The arguments you make do not help the “common man”. They help hard-currency fanatics.
The “common man” should be much happier about the Dow hitting 10000 than Gold hitting 5000. The “common man” would rather have a homebuyer credit which _might_ help someone they know, or might support prices of current homeowners (which still includes 60% of households – and dropping daily) than use that money to cover loan losses (regardless of whether the federal government takes over the banks before paying for the losses).
so, my husband and I are set to settle on a home on Nov. 9. We WOULD qualify as “move-up” buyers. Would we have to wait until after Dec. 1 to close in order to receive the tax credit?
Everything aside (and they are good points), it’s ultimately about just another way to try to keep the ship above water.
The bigger battle is far from won, yes, but it’s more like it’s about time…
Time enough for the currency to depreciate some and time to get a bit more export manufacturing and thus a bit less inflation later, etc.
Is there really no other way to stabilize prices than the $8,000 tax credit? What’s wrong with the suggestions Ted K put forward, allowing court ordered mortgage modifications or reducing the principal on mortgages consumers already hold? I’m pretty ignorant on most economic issues, but it seems to me more people staying in their houses should decrease the supply of homes on the market and thus raise prices. Isn’t that what Stats Guy is arguing for? I’m a renter myself and I really resent the incredible amount of subsidies home owners already get. Is there really no other way than continuing this madness of subsidizing housing at the expense of other kinds of investment? I can’t believe I disagree with Stats Guy on something (I don’t really comment much, but I’ve been reading this blog for a while now and I always look forward to reading Stats Guys comments. Actually, I wish Stats Guy had his own blog), but saying our only options are either large-scale deflation or the tax credit strikes me as a false choice. But like I said before I’m really quite ignorant when it comes to economics so maybe I’m wrong.
Maybe I’m looking at this the wrong way, but giving every Tom, Dick, and Jane an $8,000 tax credit to go out and buy a new house seems to me to be trying to target the demand side of the equation. I’d rather the government try and focus on the underlying supply problem. I mean isn’t the real problem here the huge number of excess houses built over the last decade? Once that $8,000 tax credit is taken away aren’t prices going to just fall back down to where they should be given the excess supply? That seems to be what happened with “Cash for Clunkers,” no?
When capacity utilization is under 80%, at least part of the problem is demand. If prices were declining in the residential market, but steady or going up everywhere else, that would be an excess supply problem.
I understand the goal is to “get the economy” moving (and reward home-building companies for their campaign contributions), but it’s hard to see how a transfer of wealth from $50k factory workers who can’t afford houses to $120k white collar workers who can is an effective strategy, let alone a just one.
NKlein – Ted K’s proposal – court ordered modifications (cramdowns) – is fine too, but this is also a subsidy to homeowners (specifically the ones who bought more than they could afford). The only disadvantage is that it doesn’t force new money into the economy, but rather transfers money from banks (first shareholders, then bondholders/taxpayers if liquidation results) to bankrupt homeowners.
I am not, btw, arguing that the tax credit is the only way to support prices (either in the sector, or globally). I’d be happy if the Federal govt (and the Fed) took some other, better-designed measures to stabilize prices and the money supply.
Indeed, a far larger price support was the Fed’s decision to buy 1.5 trillion in mortgage backed securities.
I’m simply arguing that – given our current state of affairs – having the tax credit may be better than the likely alternative (doing nothing). That’s because doing nothing is not a “neutral reward” scenario; it simply means a direct (and more costly) bank bailout rather than an indirect and less costly one.
HomeEc:
“The common man should be cringing at the sight of higher Dow, S&P, and commodity prices”
Hmm… Well said from someone who just shorted the entire market.
http://homeecblog.wordpress.com/2009/10/14/time-to-get-short/
Why do I get the sense that many people who keep arguing that prices _should_ go down, _want_ prices to go down?
70% of households with 50k or less income don’t pay any taxes at all. Indeed, many get money back via tax credits. Of the 30% of those earning 50k or less who do pay taxes, most pay almost nothing.
People who earn 50k or less are not subsidizing anything, I’m afraid.
http://taxprof.typepad.com/taxprof_blog/2009/10/47-will-pay-0.html
Moreover, due to phaseouts starting at 75k (currently), upper-earners got much smaller tax credits. At 120k, virtually nothing.
Does this alter your perceptions of the fairness of this initiative?
Actually, I already regret writing this – I’m sorry. This should remain a civil conversation, and your thoughts are clearly well considered.
This presumes that bid prices run past ask prices… Do you have any data to show this is occurring on a widespread basis? Everything I’ve seen about the “price increases” of the past couple months says NOTHING about bidding wars. The real cause seems to be the seasonal mix of home sales (real sales, vs. distressed sales). As real sales increase, the mix shifts toward real sales (which are higher priced), and the average price increases. It even increases in comparison with last year (the “seasonal adjustment”) because the absolute number of distressed sales last year was lower.
http://www.calculatedriskblog.com/2009/09/case-shiller-house-prices-increase-in.html
I do not doubt that the tax credit increases prices; that is the goal! The question is whether that is a good or bad thing. Your primary argument is that it is temporary – and that’s a valid point.
My primary response is that it depends on how it’s funded; new money, or govt debt. If new money, then it represents a permanent injection into the economy, and injecting it into a depressed housing market is about as good as injecting it anywhere else – and better than some places (like bank reserves).
My secondary response is that I’d rather give the money to a homeowner/buyer than use it to cover bank loan losses.
To be fully transparent, I only recently bought puts on 3x long financials (FAS) and AIG.
Both trades paid off rather well, but neither trade has anything to do with my perception of the right/wrong thing to do. Technical levels played a larger factor than fundamentals in both trades.
Your comment was civil. I just wish we had the same level of transparency with TARP and bailout funds.
The critical missing link in this thought is that the economy is a _cycle_.
The young high consumption family probably needs a job more than a house, so the question is – do price supports via monetary action generate jobs better than other interventions?
At the risk of repeating myself ad nauseum:
There are three ways forward and only three:
Deflation and Liquidation (the Great Depression), Deflation and Direct Government Fiscal Subsidies (aka, Japan’s lost decade, which spiked the Japanese debt to unholy levels), and Inflation.
Option 1 is bad for most people – except those who hoarded cash from the beginning. And even then it isn’t so fun.
Option 2 will ultimately result in government default of the debt, or a Great Inflation down the road (monetization).
Option 3 is the least bad – and yes, it means higher prices (which everyone hates). Most people, however, don’t connect low prices to no job.
My suspicion is that those who are REALLY arguing against option 3 are creditors, since inflation means transfering wealth from creditors to lenders. (Deflation – or indeed, inflation below prior expectations – means transfering wealth from lenders to creditors, until those creditors default, in which case it means everyone is hosed.)
Right now, we seem to be wavering between option 2 and option 3, but probably closer to option 2. When everyone worries about “deflation short term, inflation long term”, they mean option 2.
I’m sorry – and I know it isn’t “just” or “fair” – but those are the choices. There are only three.
If you want more choices, focus on the regulatory domain and look to the future.
“We should do nothing, because nothing can be done. Assets will deflate, and that’s a good thing, so that everyone can go bankrupt and debt will be liquidated and we can start creating new credit from scratch.”
Something CAN be done and it begins with turning banks back into depository institutions instead of monetary expansionists. Banks create money in this country because, as I mentioned earlier, credit is the predominant medium of exchange used in this country.
“Welcome to the logic of the Great Depression, which _sounds_ ever so appealing and fair and just. I will call this the “moralistic” argument, because it is certainly not moral.”
Comparing today’s situation to the Great Depression without first acknowledging the Gold Standard is a useless exercise. The only reason the Great Depression was truly GREAT was the pretense that currency was still redeemable. This simple check threatened to expose the fraud that caused the market crash and therefore credit could only expand at “reasonable” levels. If the environment at that time were the same as it is today, then I believe they would have made similar decisions to the ones made today. After all, they did fleece the American public of all gold holdings to keep the sham alive during the Great Depression. If that can happen, what truly is the limit of treachery?
“So which is it? Deflation? Or monetary expansion? (And note that the _Fed_ doesn’t write fiscal policy; Congress does.)”
I’m of the view that inflation and deflation must be viewed from both credit and standard monetary perspectives. One can happen without the other in a fractional reserve credit-based monetary system, yet everyone only recognizes Fed monetary expansion as the source of inflation. There is currently a trend of asset inflation in a deflationary environment. In other words, things cost about the same in dollar terms but are extremely expensive in real terms. The Fed is the source of the asset inflation in today’s economy while the banks are the source of the monetary deflation through the contraction of credit. Look at any chart of commercial and industrial credit and the collapse is obvious to anyone with two eyes. Loans and leases at commercial banks are down sharply for the first time in the fiat regime. The only form of credit not collapsing is real estate which confirms my view that the next bubble is already here.
“But we’ve already HAD a price decrease in housing on the order of 30%, and what is currently driving house price declines is NOT popping bubbles – that phase of the bust has passed.”
Asset values should not defined by previous highs/lows, but the underlying fundamentals. Price to rent ratio, median house price to income ratio, price to building cost ratio, and other valuations continue to show that housing is overpriced. Real wages have dropped steadily since 1972 (another topic for another day) and yet real house prices are roughly 15% higher. How do you justify such a trend?
“As far as supporting prices goes, a homebuyer’s credit that is funded with printed money is IMO a better way to inject new money into the economy than giving it to banks”
You completely miss the most significant impact of the tax credits. The tax credits increase liquidity which means risky legacy assets are moved away from bank balance sheets and onto public balance sheets at a faster rate. When the inevitable next wave of crisis comes to housing, the losses will be completely on the public! Public debt replaces private debt. Just because Option A is better than Option B doesn’t mean that either is a good option.
“The arguments you make do not help the “common man”. They help hard-currency fanatics.”
The only reason the common man is hurt to begin with is that their debt remains on the books of insolvent institutions and becomes more expensive. Reducing and eliminating debt is the place to start when it comes to helping the common man, not adding debt as is the current policy.
Lastly, I’m not a monetarist. If I had to put a label on my view of our current economy, it would align closer to circuitism.
“This presumes that bid prices run past ask prices… Do you have any data to show this is occurring on a widespread basis? Everything I’ve seen about the “price increases” of the past couple months says NOTHING about bidding wars.”
Bidding wars have been a factor in nearly every distressed market this summer. I’ve seen numerous articles claiming upwards of 100 bids on homes in Las Vegas, Southern California, and Miami.
Some supporting links, although I can’t find some of the articles with the more wild stories:
http://marketplace.publicradio.org/display/web/2009/07/31/pm-foreclosure-bids/
http://www.lvrj.com/business/50710327.html
http://www.inman.com/blog/2009/07/28/multiple-offers-latest-mo
http://www.maxsellsvegas.com/LasVegasBlog/
James,
I’m having trouble understanding your argument that existing homeowners who take advantage of the (about) $8K subsidy will make home prices go up. I think it’s clearly wrong. But let’s assume it’s true.
Isn’t every one of these people going to sell an existing home as well as buy another one? Thus they are the seller on one and the buyer on another. If 100% of the subsidy goes to the seller, they still get $8K don’t they? (Let’s not add in the transaction costs which are about 75 of the price or around $14K…..).
In other words, this subsidy is going to cause some people to buy a house and sell another one. So their net effect on the supply of houses for sale will be zero.
Thus, it makes some sense (though not much) to subsidize first time home buyers as it causes a reduction in the number of houses for sale and causes a somewhat smaller number of new homes to be built NOW. The long run effect seems certainly to be smaller. Thus this is arguably good for the economy.
However, it seems to me that the only effect of subsidizing existing home owners in a move is to subsidize the Realtors – who are hurting, to be sure, and thus there is some social good and, with a multiplier effect, some help to the economy.
but I can’t see any great effect on the price of houses except perhaps at the lower end of the price scale and only for a short time.
cheers,
tas
“There is currently a trend of asset inflation in a deflationary environment.”
I attribute this squarely to the Carry Trades…
https://baselinescenario.com/2009/09/26/escape-from-punchbowlism/
and
http://blogsandwikis.bentley.edu/themoneyillusion/?p=2688#comment-9031
and many other places I’ve hollered at the clouds like mad King Lear
“median house price to income ratio, price to building cost ratio”
The problem is not primarily that home prices have increased at a too-rapid historical trajectory, but that median real wages have actually declined.
Unleashing a deflationary spiral doesn’t fix that. The way to bring up wages is by increasing capacity utilization and long term investment. That means targeting nominal GDP growth.
With regard to building cost ratio, I’m deeply skeptical that still holds true (certainly not where I live – I just did the math). I’m even more skeptical that will hold true if the dollar were allowed to properly devalue and input prices hit equillibrum.
“Something CAN be done and it begins with turning banks back into depository institutions instead of monetary expansionists.”
I can’t agree more. And since we need to extract a whole ton of credit out of the economy to do this, then we’ll need to inject a whole ton of real money into the system in order prevent huge price deflation. Again, I’ve argued this so many times I’ve lost count.
https://baselinescenario.com/2009/09/20/protect-consumers-raise-capital-and-jam-the-revolving-wall-st-washington-door/#comment-28534
Housing is such a train wreck, I’m afraid you poor folks are going to have to make the housing subsidy permanent.
In fact, why doesn’t the government just pay everyone a big, fat salary directly and be done with it? It’s all just free money after all, isn’t it? That’ll reflate, won’t it?
Yesterday, my husband and I closed on a house in a neighborhood we’d been looking in for five years. It’s given me a somewhat different perspective of the value of this tax credit, though I won’t benefit from it directly. The new house isn’t my first home; and I closed before the renewal will be in place.
The sale of a home typically takes place in a long, sometimes very long, chain of transactions; I buy your house and sell mine, you sell your house and buy another from someone else, etc. Chains break when someone sells without the intent to buy, isn’t dependent on the sale of their current home, or enters the market for the first time.
With the lack of credit in the system and the instability of prices, that chain is vulnerable, often over relatively small bits of cash. With these credits in the system, it helps smooth those bits and bumps out, protecting the transaction chain.
Focusing the credit on new buyers was good; it started new chains of transactions where a seller was not dependent on their buyer’s sale going through.
And the credits also provide seed money for all the various industries necessary to the home-sale industry; the building inspectors, title companies, etc.
Simply viewing the tax credit as a gift to an individual buyer ignores the impact it has on the chain of transactions, and its total stimulative impact.
Sorry, the second paragraph shouldn’t be “chains break down,” but “break apart.”
The question is really, of course, how does this help the economy? I suggest that the credit only helps banks (some, who are actually making mortage loans), will slightly increase economic activity, but really won’t help the baseline of the rest of the economy. I believe that the number of people who qualify, and who are willing to risk home purchase in the current economic climate, is relatively insignificant.
Bottom line? There is a much better use for the amount of future taxes placed at risk in this credit.
But, what do I know?
This is bad economics, bad policy and good for me (although it will not have any impact on a potential buying decision). I’m retired and my wife will retire next spring. We hope to relocate to New Mexico, so we will be selling a home in a strong market and buying one in a weak market. Consequently, we may not get caught by price inflation at both ends. I love it; it’s stupid but I love it!
The extra $8,000 subsidy doesn’t increase the supply of houses on the market, it increases the market clearing price and the market clearing quantity of homes. Go back to your supply and demand curves and move the demand curve up $8,000. If most of the houses changing hands go from empty to occupied, the subsidy is achieving it’s purpose of soaking up some of the excess inventory. You are of course, correct that this is no bargain for the buyers, the price will drop some when the subsidy is removed. I presume that the hope is that by then the on the market supply will be low enough so that prices don’t drop by the full $8,000 (at least for those who bought early.