Out of Control Policy Blog

Stop Artificially Propping Up Housing Demand

Lots of information has been brought forth recently as discussion of extending the $8,000 credit for buying a home has heated up. And with results like these, how could they not extend it? From WSJ:

It's hard not to laugh when viewing the results of the federal first-time home-buyer tax credit. The credit, worth up to $8,000 for the purchase of a home, has only been available since April of last year. Yet news of the latest taxpayer-funded mortgage scam has traveled fast. The Treasury's inspector general for tax administration, J. Russell George, recently told Congress that at least 19,000 filers hadn't purchased a home when they claimed the credit. For another 74,000 filers, claiming a total of $500 million in credits, evidence suggests that they weren't first-time buyers.

Among those claiming bogus credits, at least some of them were definitely first-timers. The credit has already been claimed by 500 people under the age of 18, including a four-year-old. This pre-K housing whiz likely bought because mom and dad make too much to qualify for the full credit, which starts to phase out at $150,000 of income for couples, $75,000 for singles.

Yep, four-year-olds are buying homes. Let's keep this sure fire, really helpful program going. Since cash for clunkers did really well in building long term demand for cars, there is no way extending this program wouldn't do the same.

Oh, wait, C4C caused a spike in automobile sales in a short window that cleared some inventory but has left a dark hole of depressed demand in its wake. If you were gonna buy a car now, why not few months ago when the program was hot?

The crazy thing is that, even with the housing credit, which has been snapped up readily, the housing market faces a seriously troubled road ahead. While home sales picked back up in January (before the credit) and have slowly climbed this year, there are signs of that leveling off, even given the seasonal adjustment. And in the west, where the sales decline bottomed out first, it looks like there is another decline forming—and that is not good news for the rest of the country, since the West is a leading indicator on housing.

Of course, Washington's answer to this problem seems to be giving money away to increase demand. But this ignores two critical points: first, the cost of the program is adding billions to our national debt, about $1 billion a month at this point. Second, why would we create an artificial demand for housing when a government supported artificial demand for housing is what was a major cause of the crisis in the first place?

Anthony Randazzo is Director of Economic Research

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Comments to "Stop Artificially Propping Up Housing Demand":

MJ | October 31, 2009, 12:15am | #

Oh goodie. At least Congress had the sense to end C4C after $3 billion.

Ted Gayer over at Brookings had a nice article dissecting the housing tax credit program and demonstrating its shortcomings. He looked at it from the perspective of either extending the current $8K credit or ramping it up to $15K per house, which some in Congress have proposed.

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