It's looking more likely that the $8,000 first-time
homebuyer credit set to expire next month will really, truly
expire.
Plenty have begged and pleaded for the credit to be
renewed, saying it's ushering the housing market into
greatness. Others have argued it's merely a prop -- and a
badly conceived one at that -- doing more harm than good.
The latter group appears to be winning. On Monday, Housing
and Urban Development Secretary Shaun Donovan said he
"[doesn't] believe that a catastrophic decline would be the
result of the end of the credit." That was one of the first
anti-credit confirmations so far from a government official
whose opinion holds some weight.
And he's right, most likely. One of the most shocking
examples of how ineffective the credit is comes from a simple
illustration from the superb blog Calculated Risk (emphasis
mine):
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.
With 1.9 million first-time buyers, the total cost of
the tax credit will be $15.2 billion. Divide $15.2 billion
by 350 thousand,
and the program cost $43.4 thousand per additional
buyer . The actual number could be much higher if
there were fewer additional first-time buyers than the
NAR's estimate-or if the overall cost is higher (more
buyers claiming tax credit).
In short, most of those who received the credit would have
purchased a home anyway. Now, 350,000 is a lot of new buying
activity, but the cost to subsidize those sales -- roughly
$43,000 per buyer -- is so atrociously unfair to taxpayers
that keeping the program in existence is insane. For
comparison, the average household earned about $50,000 in
2007.
Plus, as my colleague Matt Koppenheffer
notedregarding the comparable cash-for-clunkers program,
these subsidies reduce future demand. It's just front-loading
sales, which was awesome for auto companies like
Ford (NYSE: F) for about four weeks, but not
a day longer.
The same can be said for the
2008 stimulus packagethat gave checks to millions of
Americans. The spending effects juiced retailers like
Wal-Mart (NYSE: WMT) and
Target (NYSE: TGT) for one quarter, max,
before they fell back to ordinary levels. The lasting impact
these subsidies provide is quite limited, and their
continuation just highlights the desire to fire short-term
actions at long-term problems.
Who knows. Maybe the credit will get an extension,
pleasing
Fannie Mae (NYSE: FNM) and
Freddie Mac (NYSE: FRE) with
subsidized fictiona little longer. But some day, the
credit has to end. And then we'll ask: What then? Will we
have to face -- gasp! -- reality? Mmm-hmm. Subsidies work ...
until they don't. That's what makes these programs so
frustrating.
This article was originally published as
Kiss the Housing Credit Goodbyeon
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