Friday Rant: Tax Credit Stimulus for House Buying — And the Point Was?

Special tax credits for home buyers that expired in May helped to pull some sales forward but were also a major contributor to "an unprecedented 33 percent collapse in new home sales from April to an annual pace of 300,000, less than the median estimate of economists surveyed ... and the fewest in data going back to 1963..." according to a recent report from Bloomberg News. And at a time when the pace of economic recovery is uncertain at best -- many economists are even withholding forecasts -- and a viable strategy / policy to reduce the ballooning federal deficit remains elusive, why implement false motivation to spend sooner than later when the only possible net outcome was to reduce sorely needed tax revenue and exacerbate an already depressed market in the aftermath?

My assumption is basic: Most, if not all, stimulus induced home buyers would have purchased a home within 12 months of the stimulus period with or without it. According to Market Watch, "In order to qualify for the federal tax credit of up to $8,000, a buyer needed to sign a sales contract on a home by the end of April ... Sales increased a cumulative 29% between February and April. But once the credit expired, sales collapsed in May." And now "If sales remain weak, home prices could fall further, which would in turn depress consumer spending, increase foreclosures and lead to more losses at banks." Making matters even worse, Bloomberg hints at another possible negative corollary stating "Figures from the Commerce Department showed purchases at retailers dropped in May for the first time in eight months." Very plausable as consumer spending for remodeling and related durable goods has historically been driven by home sales.

The National Association of Realtors, according to the WSJ further claims that "Sales of existing homes fell in May, hurt by delays in mortgage applications and uncertainty over a federal flood insurance program ..." And The association's chief economist, Lawrence Yun, said "We are witnessing the ongoing effects of the home buyer tax credit, which we will also see in June real estate closings ... approximately 180,000 home buyers who signed a contract in good faith to receive the tax credit may not be able to finalize by the end of June due to delays in the mortgage process, particularly for short sales.'' Mortgage processing from many of the same banks the fed bailed out in 2009.

So while I'm at times a voice of moderation surrounding complete free market advocacy here at Spend Matters, the federal resources and energy spent -- and revenue sacrificed -- for these silly paternalistic one-off programs, from cash for clunkers to home buying tax credits, really need to be taken off the table.

William Busch

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