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Will Tax Credits For Home Buyers Stimulate The U.S. Economy?

Las Vegas, March 2003. I’m in from Chicago for a bachelor party and notice two of the guys I’m with are upset at each other. One of them, Jim, tells me that Bob is angry at him because he’s not gambling enough at the hotel/casino we’re staying at. Jim, who has a wife and kid and is stretched for cash at the moment, explains that Bob’s family are VIP’s of the hotel/casino and made arrangements for our accommodations. I’m also told that Bob’s family is receiving “comps,” or freebies that the casino gives you in return for spending money playing the games at their casinos. These could be food and beverage comps, like a free breakfast buffet, to free rooms for a future stay. So, the more money the members of our party spend, the more comps Bob’s family receives. Hence, Bob’s displeasure with Jim. And later on, me (guilty as charged!).

I appreciate Bob and his family for taking care of the Vegas arrangements (although I never asked them to). But, why would I spend more money than I originally intended to for the benefit of someone else?

Photo by Bob Townsend

In a press release dated January 10, James M. Weichert, president of Weichert, Realtors, a national brokerage, proposed that the U.S. government should offer a tax credit to people who buy homes as a way to “stimulate” the slowing U.S. economy. According to the Chicago Tribune this morning, Weichert has been meeting with officials of the National Association of Realtors to discuss a congressional strategy for the proposed tax credit. He said:

For years, economists have drawn a correlation between the real estate market, the largest segment of the gross domestic product, and the overall economy. When the housing market is flourishing it drives the economy. After the housing sector stalled, we began seeing a negative ripple effect. To me, the fastest and most logical way to economic recovery would be to provide an incentive in the form of a tax credit to home buyers to re-energize the housing market and in turn other sectors of the economy.

According to Steve Alessandrini, a spokesman for the New Jersey-based company, that’s about the extent of the plan’s details. “Obviously, that press release is a little vague,” he told the Tribune. Alessandrini added:

There are a lot of proposals out there, a lot of them focused on mortgages and providing relief to the at-risk market. But that’s not going to stimulate the housing economy. If you create an incentive for buyers, [a tax credit] would help out in reducing the surplus inventory [of homes for sale]. It’s also going to put more money into the economy.

There are mortgages out there for qualified buyers, but a lot of them remain on the market sidelines. These people need a push, and this plan would create that.

I’ve yet to see any evidence showing that the United States is anywhere near a bottom in the housing slump. A few “experts” have gone out on a limb and called a bottom, only to get burned (the ball’s still in play for White House chief economist Edward Lazear, who announced a housing bottom by June 2008). In this market, I’d have to think that a significant number of potential homebuyers will continue to remain on the sidelines for quite some time. Why? Because they don’t want to buy a home, thinking they got a bargain, only to see its value depreciate more. The prevailing psychology is, why buy now (tax credit or not), when homes are probably going to be tens of thousands of dollars cheaper in the near future? I know, it’s been said you shouldn’t try to time the housing market. Yet, it appears the housing downturn still has a ways to go.

Bloomberg noted this morning that:

Falling property values and tougher borrowing rules will lead to more foreclosures and keep the real-estate market in recession for most of this year, economists said.

Regarding property values, in a December 30 post I talked about how Robert Shiller, Professor of Economics at Yale University and co-founder of the S&P Case/Shiller house-price index, warned of more declines in U.S. home values. Shiller said:

American real estate values have already lost around $1 trillion. That could easily increase threefold over the next few years. This is a much bigger issue than sub-prime. We are talking trillions of dollars’ worth of losses…

The last available data for the quarterly S&P/Case-Shiller U.S. National Home Price Index (which covers all nine U.S. census divisions) showed U.S. home values were down 1.7% from Q2 2007. Year-over-year, national home prices declined 4.5%.

But all real estate is local, right? Talking about the nation’s housing woes, Paul Kasriel, chief economist at Northern Trust Co., told the Chicago Tribune back on January 13 that Chicagoland’s problems “illustrate just how serious this housing bust is. Geographically, it’s all over.” The paper noted that Kasriel, like most forecasters, “expects the residential market overall to worsen through much of 2008.” He explained that real estate is “a chain-reaction market,” and the chain is broken. “Without that first-time buyer, there’s no chain reaction,” said Kasriel, recipient of the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005.

Weichert and Alessandrini emphasize the importance of the qualified buyer for their “stimulus” plan. A post by CNBC real estate reporter Diana Olick Friday afternoon makes me wonder if they overestimate the number of qualified buyers this time around. Olick wrote:

We’re talking today about what will get buyers back into the market, especially when all the so-called experts we put on the air say that prices are going to continue to fall through the rest of 2008 in the bulk of the nation’s housing markets.

Interest rates are low, affordability is improving, inventory is sky-high, and sellers are well aware of the difficult market. What’s better than all that for a buyer?

Well there’s the catch-the-falling knife issue with prices, and then there’s the mortgage issue. Whether it’s new or refi, the issues are the same. A mortgage broker I know writes:

“We’re undergoing a min refi boom right now with 30-yr conforming fixed rates not far off record lows. The difference this time around is the limited amount of people that qualify…”

So, will a tax credit for buying homes “stimulate” the U.S. economy? Doubtful. In Las Vegas, knowing the odds is important to one’s success on the casino floor. Odds are, the housing slump will continue on for the foreseeable future. Odds are, home prices will continue to fall. Which leads me to ask, why would someone gamble on buying a home in this market just to get a tax credit, the equivalent of a Vegas comp? Also, is it me, or is the real estate industry hoping to make out like Bob’s family in this situation?

You know what? What happens in Vegas should stay in Vegas.