The End of the Federal Housing Credit

On April 30 the eight thousand dollar federal home buyer credit will expire. This has prompted a brief spike in home sales as people lower the prices of their homes in order to try and sell before the credit expires. Despite a recent increase in the number of pending sales and contracts the housing market has continuously underperformed during the current recessionary period. After the housing market collapsed in 2008 home prices have refused to rebound in any significant way. Housing prices hit all time lows even after the introduction of state and federal subsidies for new homebuyers which were enacted to stimulate demand. Speculators worry that repealing the federal home buyer credit will result in a further decrease of the value of homes since any demand created by the credit will be removed. Some lawmakers advocate extending the credit although there are no figures on whether the plan had any significant effect on demand for new homes. Even if the credit is not extended there are plenty of states that also offer home buyer credits. Despite an impending debt crisis California voted to extend a 10,000 dollar home buyer credit last week, New Jersey and South Carolina have similar plans.

What the government can’t seem to understand is that artificially creating demand will do very little to stimulate the economy in the long run. And unless you keep the programs in place forever, which they very well might try and do, the demand will evaporate as soon as the artificial stimulation is repealed. Housing prices need to be allowed to fall to their real market value, the whole reason we got in this mess in the first place is because prices have been artificially inflated creating rampant consumer spending not backed by any real production. Price deflation in the housing market is a result of market forces at work trying to bring housing prices back to reality so that more people will be able to afford homes and capital can be allocated in a more efficient manner. The recent spike in housing sales highlights this, more homes are being bought and sold because sellers have lowered prices in anticipation of the end of the credit, if the credit stays in place there will be no incentive to lower prices instead the opposite will happen as artificial demand will produce artificially high prices. Sure this will benefit the few sellers who are able to close on their homes but it will also allow people to take out loans based on artificially high prices and spend and speculate their way into the next recession while also denying people access to affordable housing.