Extending the new home buyer tax credit is a stupid idea (bluntness intended).
Here's what's up:
Isakson’s legislation would extend the program through the end of 2010, almost double the credit to $15,000 and remove restrictions that prohibit individuals who already own homes or earn $75,000 -- $150,000 for couples -- from getting the tax break. The bill, first introduced in June, failed in a 47-50 Senate vote in August.
The bill has at least 15 co-sponsors including Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and senators Patty Murray, a Washington Democrat, and Joe Lieberman, a Connecticut independent.
So why is this a stupid idea, let me count the ways:
1. As Calculated Risk pointed out this morning the cost of the about to expire credit worked out at about $43,000 per "extra" house sold, and the newly proposed credit would cost $63,000.
But if we actually look at the numbers, this is a poor choice for a second stimulus package. The NAR recently reported:
NAR estimates that about 1.8 to 2.0 million first-time buyers will take advantage of the $8,000 tax credit this year, with approximately 350,000 additional sales that would not have taken place without the credit.
You can calculate the new $15 billion projection; 1.9 million times $8,000.
But this only resulted in 350,000 additional sales. Divide $15 billion by 350 thousand, and the program cost is about $43,000 per additional buyer. Very expensive.
Now the National Association of Home Builders estimates that expanding and extending the credit through 2010 would generate 500,000 additional sales at a cost of about $30 billion. So this is approximately $60,000 per additional house sold. And I think the cost will be much higher.
2. These types of incentives typically "pull forward" demand. They do not create demand. Later on, or when the first program expires, low and behold there is no demand again.
Of course the realty business already knows this...
Realtors, bankers and homebuilders have joined in the push, starting a campaign that encourages Congress to extend the program for one year with the tag line: "Don’t Let America’s Real Estate Recovery Expire." Executives including Fannie Mae’s Michael Williams and Hyperion Partners LP’s Lewis Ranieri have attributed improvements in home sales and prices to the credit, and Isakson said he is worried the market may suffer without it.
"If you take that kind of business out of what’s already a very weak housing market, you do nothing but protract and extend the recession," Isakson said. December "marks the beginning of the historical worst time for home sales," he said.
3. We see the "pull forward" problem with the Cash for Clunkers program
Chrysler Group LLC, the U.S. automaker run by Fiat SpA, said nationwide industry sales are off 19 percent so far this month after a government purchase- incentive program ended.
"We are going to see harsh reality in September," Sergio Marchionne, the chief executive officer of Fiat and Chrysler, said at the Frankfurt Motor Show. He described the U.S. industry results as a "disaster." Fritz Henderson, CEO of General Motors Co., said the market is "very weak" this month.
Who would have thunk it.
What you ended up with was either a) cash buyers who gladly took the government cash (which of course was borrowed from... China?) or b) people who only bought because of the free money, trading in a likely paid off car and in return getting a new (probably foreign) car with nice shiny new monthly payments to go along with the new government debt.
The car companies were happy for a few weeks, but now we get the hangover.
4. Many of the people buying new houses under the new home buyer program are buying using FHA. With a 3.5% down payment and the tax credit they can pretty much get into a place with no money down.
Now remind me again....putting people into houses with no money down, wasn't that part of how the whole mess got started?
Don't be surprised if in a few months we start seeing a whole bunch of FHA mortgages falling by the wayside.
I'd rather see a mandatory 10% down payment as a new program. Yes house prices would drop further, but they would then be at a more sustainable level, compared to income.
As a little insight into how the real estate business can "heal" take a look at this video from Jim The Realtor. He shows how investors picked up 5 houses from banks (with 100% cash) with the intention of renting them out and then maybe selling in a few years. They did a nice job fixing them up (purchase prices around $160,000, then add in $40,000 in improvements). But the market as so hot with FHA/tax credit buyers that they were able to flip them all in a matter of days after listing with multiple offers.
5. Interestingly in the UK now both the Labour and Conservative Parties are trying to out do each other with promises to reign in the deficit.
Prime Minister Gordon Brown said Britain’s Labour government will have to cut spending in order to reduce its debts, bowing to pressure from the Bank of England, Standard & Poor’s and opposition politicians.
"I must tell you the tough truth about the hard choices," Brown said in a speech to union leaders in Liverpool today. "Labour will cut costs, cut inefficiencies, cut unnecessary programs and cut lower priority budgets."
It’s the prime minister’s most explicit statement yet on the need for restraint on government spending and a reversal of his position in June, when he pledged more investment in the face of calls from the Conservative Party for reductions.
The same "deficit cutting" mantra will arrive in the US soon as well. (No more cash for houses, clunkers, or whatever).