First-time home buyers tax credit an unmitigated failure

First-time home buyers tax credit had only a few winners: real estate agents and sellers.

Michael Conroy/AP/File
In this October 2009 photo, a "sold" sign is shown in front of a home in Carmel, Ind. Last fall, home buyers were rushing to complete their purchases before a first-time home buyers tax credit expired.

At the risk of beating a dead horse I’d like to highlight very clearly exactly why the first-time home buyers tax credit should unambiguously be considered failed policy that did (and will continue to do) far more harm than good.

Recall that before its implementation the main argument against the policy was that by incentivizing home purchases, the government was at best forestalling the inevitable completion of the correction occurring in the nation’s housing markets while simultaneously encouraging millions of hapless American households to leverage up large debt burdens at the very moment when deleveraging was clearly the more prudent financial direction.

In a sense, big government was showing their behavioral economic prowess exploiting the human compulsion for immediacy by dangling an $8000 payoff just over the heads of an American populace that has been shown to be largely incapable of comprehending even the most basic of financial decisions.

While the “winners” of this bribe likely gained a sense that government had offered them a “no-brainer” proposition, these unwitting rubes likely had no idea that the government was dangling their “gift” over an abyss of home price deflation.

Further, one of the more interesting effects of the failed policy was that it appears to have encouraged a notable rise in inventory as side-lined sellers determined that their best opportunity to dump their bad asset was under the guise of the government’s smokescreen housing effort.

All told, the government scam worked just about as predicted, new and existing home sales spiked up just ahead of each of the credit expirations (November 2009 and April 2010), homebuilder’s simultaneously registered significant increases in buyer traffic, prices trended up with the increase in transactions and inventory increased as sellers perceived an unique opportunity to pass off their bad asset.

As expected though, in the months following the final expiration, new and existing home sales plunged to record lows while buyer traffic pulled back to near all-time low levels and prices abruptly topped out and started to trend lower appearing to be headed back at a fresh strike at the lows set in early 2009.

Of course, this scam policy had its share of winners namely Realtors, homebuilders and crafty existing home sellers that pocketed hundreds of millions flipping (or assisting in flipping) junk housing assets on to the balance sheet of a fresh population of previously unexploited households.

Finally, as prices continue to decline in coming months look for a notable jump up in foreclosures as many of these “stimulated” home sales mature and season into unmitigated failures, a perfect reflection of the worth of the policy itself.

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