Tuesday, 27 October 2009

The Inanity of the Home Buyer Tax Credit Laid Bare

For anyone who missed it, Nemo at self-evident had a good post on why the tax credit for newbie home buyers is a really dumb idea (The First-time Home Buyer Tax Credit is Idiotic; he doesn't mince a lot of words). He had a follow-up here to explain it all in (brace yourself) the economic parlance of supply and demand curves.

I'll just cherry-pick a few reasons why the tax credit is stupid:
1. It forestalls the setttling out of home prices at their natural bottom, which is what we desperately need before the U.S. housing market can begin a sustained recovery.
2. It encourages first-time homebuyers to leverage up too much to buy a home (and what's more, they won't be buying at the natural bottom -- see point #1 -- so they stand a greater chance of winding up underwater on their mortgage).
3. Once you start shifting around the supply and demand curves, you find that the tax credit, if anything, induces developers to boost the supply of homes in the market. But the housing market, if anything, is suffering from a glut of units right now.

So why do we have an idiotic tax credit gumming things up? To throw a crutch under the housing market to help the banks and beleaguered homeowners, even though we could do more with the money by just writing everyone a bunch of checks and save all the paperwork and economic distortion? Yeah, that's part of it.

The other part is what Washington has become: a giant pork pull. Politicians know that their policies don't need to make any economic sense as long as they're shoveling enough free money out the door to keep enough Joe Averages in the constituency happy enough to re-elect them.