Thursday, October 08, 2009

Robbing Your Grandkids to Buy Your 46" LCD

The powerful National Association of Home Builders has begun its push, coordinated with the National Association of Realtors, to extend and EXPAND the home buyer tax credit.

"NAHB estimates conservatively that approximately 200,000 additional home sales are attributable to the tax credit and that it has resulted in a net increase of 187,000 jobs.

Extending the credit through Nov. 30, 2010 and making it available to all purchasers of a principal residence would result in an additional 383,000 home sales and generate 347,000 new jobs in the coming year."

There are various estimates on the number of people that have taken advantage of this program but most estimate around 1.5 million people will take advantage of the credit. Some simple math shows us that this program will cost about $12 billion (1.5 million x $8,000) or roughly 4 times the size of the cash for clunkers program. However, here's the key... according to even the most optimistic of observers (the NAHB), only 200,000 of the 1.5 million people (13%) that took advantage of the program, did so because of the credit. The other 1.3 million people were going to buy a house anyway.

So, let's look at the NEW math - $12 billion divided by 200,000 = $60,000. EVERY NEW HOME SOLD UNDER THE PROGRAM COST THE TAXPAYERS $60,000!!!

However, it gets worse. Now the NAHB wants to expand the credit beyond first time homebuyers to ANYONE. So, if there are 5 million home sales in 2010, the cost of the program will grow to at least $40 billion to generate 383,000 extra home sales. That's a cost of $104,000 PER ADDITIONAL HOME SOLD!!! This assumes that Congress only approves an $8,000 credit. There has been talk that it should be increased to $15,000 which would boost the total size to $75 billion and the cost per additional home sold to a whopping $196,000!!!

This is staggeringly inefficient even by our government's standards.

A couple of other thoughts....

* The FHA has required as little as 3.5% down on many new loans (going up to 5% soon) so many have used their $8,000 tax credit as their down payment. If you're not financially stable enough to save up 3.5% of a home's value, maybe you're not ready to be a homeowner.

* The buying surge in the low-end of the housing market is going to lead to substantial vacancies in the rental market. This will lead to more commercial loans defaulting and more trouble for the banks (and many of the new buyers are not the most stable citizens financially). Wash, rinse, repeat.

This program is much like the cash for clunkers: it's an expensive way to stimulate a little extra demand for a short period of time, but the cost will be with us for decades.

If someone ever gets the chance to see any of the candidates running for NY-23, perhaps you could ask their position on extending the credit?

Cheers!

5 comments:

Anonymous said...

I'd much rather ask them their thoughts on the concept known as "Feed in Tariffs." Sadly, I doubt any of them knows the term much less supports legislation to create it here in New York. Creating such a system here would be an excellent way to stimulate our upstate economy. And it would affect home builders, suppliers, electricians, and potentially, manufacturers.

The Artful Blogger said...

Good point re: FiT but it has all of the buzz words that get you killed in today's media if your a politician - utilities are "obligated" to buy "renewable" energy at "above market rates" set by the "government". The lunatic fringe would go crazy over a program described like that.

The FiT programs fit well with a news story that I'll post later tonight.

The Artful Blogger said...
This comment has been removed by the author.
Anonymous said...

There is one good thing about all of this "pay-it-forward" vote buying. The billions and Trillions are essentially "set" in 2009 and 2010 dollars.

By 2015-20 when $100 US bills come in rolls like toilet paper, the real cost will not be as much as it now appears.

SMTF

The Hermit said...

Hmmm. You mean there is no free lunch? !! Everything has a price and has to be paid for.
AVOID debt.