Five Reasons the U.S. Doesn't Need More Home-Buyer Perks By Jack Hough Smart Money 11-02-2009

Five Reasons the U.S. Doesn't Need More Home-Buyer Perks By Jack Hough Smart Money 11-02-2009

Five Reasons the U.S. Doesn't Need More Home-Buyer Perks
By Jack Hough
Smart Money
November 2, 2009

Congress is working on a new and even more generous set of perks for house buyers. A tentative deal in the U.S. Senate would extend the closing deadline for an $8,000 subsidy for first-time buyers to July 1 from Nov. 30. It would also boost the program's income limits for singles to $125,000 from $75,000 and for couples to $250,000 from $150,000, and would offer a new $6,500 reward for existing homeowners who buy again. (More on the home buyer tax credit.)

The National Association of Realtors has called such an extension "essential." The Mortgage Bankers Association agrees. The National Association of Home Builders says, "Failure to act now could derail the fragile housing recovery even before it has time to take root."

I respectfully disagree for perhaps a dozen reasons. Let me offer five.

Subsidies raise prices, and house prices are already too high.
Consumer subsidies puff up buying power, which artificially increases demand, which raises prices. With most goods, manufacturers respond by increasing supply, which brings costs back down. Some goods face constraints to new supply, though. We can build more colleges, but we can't magically make more of the longstanding, prestigious kind. We can make more pills, but we can't violate drug makers' patents on popular ones. And we can build new houses, but there's only so much space (or building permission) in the choicest locations. That produces a paradox: America's government has for decades spent mightily on affordability initiatives for college courses, health care and houses, and yet prices for all three goods have increased faster than the rate of inflation, resulting in less affordability.

In April 2007 I wrote that houses had gotten so expensive that renting had come to make more financial sense. In July, with prices down about 30% nationwide, I charted them against rents and incomes to show that the country was closing in on its historical level of housing affordability, but wasn't quite there yet. It never did get there. Prices in most markets have increased each month since then. We're moving away from normal, not toward it. When the National Association of Home Builders speaks of a "fragile housing recovery," it means an increase in prices. But what about a recovery of the ability of ordinary Americans to buy houses at fair prices? That recovery might have to wait.

The house subsidy has little value as economic stimulus.
The current $8,000 payment to house buyers was proposed as more than a simple perk. The law that created it is titled the American Recovery and Reinvestment Act of 2009. Proponents cited the spillover effect of house purchases on the rest of the economy. Putting aside the matter of whether stimulus spending helps (until item No. 3), the most useful stimulus spending does one or both of these two things well: It begets more spending then it provides, or it leaves behind something useful. Food stamps create $1.73 in economic activity for every $1 we spend, reckons Moody's That makes sense. The poor spend just about everything that falls into their hands, and the money they spend at food markets leads grocers to spend with suppliers, and suppliers to spend with farmers, and so on. A dollar spent on unemployment benefits creates an estimated $1.63 in economic activity and one spent on infrastructure, $1.59. The result of these things? Bellies are filled, the jobless are given a lift and roads and power grids are upgraded (and, of course, a bit is wasted along the way).

Ted Gayer of the Brookings Institution, a think tank, estimates that only about 15% of house buyers who've received $8,000 payments to date wouldn't have bought houses without the payments. The good news is that suggests the payments have played only a minor role in house prices reversing, and so we might not get much more of a run-up in prices from extending the plan. The bad news is that we're wasting money. A dollar spent on the housing credit creates an estimated 90 cents of economic activity. That's not a multiplier effect. It's a divisor effect.

The benefits of stimulus spending are unproven.
There's a reason economics is categorized as a social science in course catalogs and such. It's to differentiate it from actual sciences, like physics and chemistry. While economists use scientific methods, much of what they study can't be tested in a highly controlled setting, and so can't be known for sure. On the subject of large, industrialized nations spending government funds to hasten the end of a severe economic slowdown, there are only two applicable case studies. One is Japan over the past two decades and the other is America during the Great Depression. Japan's economic woes haven't ended. And the Great Depression isn't called "great" because of how quickly we fixed it.

Maybe the sudden rise in gross domestic product reported Thursday is a sign the stimulus efforts have worked, or maybe it means we've paid dearly for a temporary blip in the numbers.

America has no money.
Perhaps I should have mentioned this earlier. America was last debt-free in 1835. The last year it spent less than it collected from taxpayers was 2001. In the government's fiscal 2009, which ended Sept. 31, it overspent by an estimated $1.4 trillion, more than ever before in dollars, and more than any year since 1945 in proportion to the size of the economy. Perks for house buyers don't come from the government, ultimately. They come from taxpayers, either this year or in future years when the debt is paid.

By Nov. 30, the government will have spent an estimated $8.5 billion on its current round of house-buyer payments. (A Treasury Department inspector estimates that $139 million of that went to fraudsters who didn't actually buy houses, but I'm trying to keep my list of grievances to five.) Early projections for the proposed extension say it will cost close to $12 billion. Together, the programs would cost the average household more than $170 if the bill were paid right away. But it's borrowed money. The interest rates charged to America for its debt at the moment are blessedly low--about 3.5% on 10-year loans. The average since the 1960s is 6.9%. Let's split the difference and assume the nation will pay roughly 5% on its debt over the next 30 years, the time it might take one of those $8,000 subsidy recipients to pay off the mortgage. By then the program's true cost will have increased more than fourfold.

We already spend plenty on housing stimulus.
We already have programs that draw funds from all taxpayers and divert them to house buyers. The mortgage interest deduction does just that, only its benefits are reserved for those who borrow to buy houses, and for those whose incomes are high enough to make hunting for deductions come tax time more worthwhile than claiming the standard deduction. The interest deduction is what's called a tax expenditure. It will cost just over $100 billion this year, or about $850 per taxpaying household. Not enough? There's more. Interest rates are kept low at the moment by aggressive buying of mortgage securities by the Federal Reserve. We can't say for sure how much that will cost. It depends on how many of the underlying borrowers make good on their payments, which depends in part on how much of their own money they put into the deal to begin with. Did I mention that the $8,000 house-buyer perk can be used for a down payment?


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Excellent post, after that I shudder to think of the inflation we have coming our way. My kids won't be able to make a living, the majority of their income will be taken out for taxes! All the more reason to invest in real estate now to protect their future.



Cathy B

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Thanks for the comments and the additional insight. I often enjoy reading various prospectives on real estate. YTo unever know what the general public may do next, but the media helps to play a role into guiding people at times. The key is take in all the information and make the best decisions for your area. I also believe that the time to buy is now because down the road plenty of people may be saying..."I should have"..."I could have"..."but I didn't", etc. Keep up the good work. Believe and Achieve! Smiling - Joe


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Thanks for sharing,There is alot of good info in the article.If they extend the tax credit with the limits raised(75k to 120k and 150k to 250k) plus baiting existing home-owners,It just sounds so crazy and reminds us the world of hurt we are in.What ever it takes to get rid of inventory(new and existing homes),The new construction will come back...And the jobs will too.I always knew construction was a key piece,It really never dawned on me how BIG a piece it is to the economy.
Great read,Joe!


Invest in yourself!


Thanks for the comments and insight. It is rather amazing how the housing market can help to drive the economy and the related industries that support the housing industry. In my area I even see he effect on contractors, builders, bankers, movers, furniture stores and of course realtors. It will be an interesting learnign experience to see how this market will adjust during the next several months. Believe and Achieve! Smiling - Joe


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Thanks Joe

Good post. That will motivate more buyers to go out & buy a home so that will help us to build a retail buyers list. On the other side, it doesn't really motivate un-qualified buyers because they already know their credit is in the crapper. We as investors do have the techniques to help on both ends so we just have to encourage both parties to buy a home today before these benefits go away which I don't see that happening anytime soon. Who knows I could be wrong, hopefully not. Don't just build a buyers list with investors, you should also be doing it with retail buyers.

Everyone Can Make A Difference!
John A.

Thanks Joe for the info.

I have a question on the 8,000 credit. The article states at the end that it can also be used as the down payment. Is that correct? Thanks in advance...Pete

Continued - and rasied?

Thanks for this Joe. I was at a REI meeting last month and a speaker "in the know" said they would extend the credit, and raise it to $13K. We'll find out soon enough what the story is. It seems like every RE listing says "act now before Nov. 30th" - every one of those listings is praying nothing is announced until Dec. 1st.


"Do or do not...there is no try" - Yoda


I dont believe that the tax credits are going away anytime soon .With the job market way down ,the majority of those who want to purchase a house are hanging on to the little savings which they still have just in case they lose their jobs. If more jobs are created whether thru the green industry or clean energy or infracture rebuilding, whatever ,I believe that we are going to experience a mad dash to eat up the housing inventory. At the same time in many cities I believe there will be a moratorium on building new housing units because of fear of a repeat ARTIFICIAL DOWN TURN SO I AM EXPECTING THAT HOUSING PRICES FOR EXISTING HOUSES RIGHT NOW WILL GO BEYOND THE PAST BUBBLE. MY question is how do we take advantage of the existing tax credits right now, while staying in the restraints of law and integrity.

If it is true that the tax creditS will be super extended to include current home owners does this suggest that small time investors like those just getting started have a chance to avail themselves of these tax credits and make a purchase or two. what do you think?An will these second time home buyers be given any assistance with down payment, closing cost, title search or whatever .It sounds too good to be true.I might have to find an ACORNER with the know how to point me personally in the right direction. What say you?



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