Homebuyer tax credit nearing renewal

Stupid stuff like this is why, after a decade of voting straight Democratic in state and federal elections, I decided to stay home yesterday and let the winds of change blow. I'm disgusted with both political parties.

How the crisis could change economic theory

Here's an interesting look at how our little housing bubble may change macroeconomic theory.

The crisis exposed the inadequacy of economists' traditional tool kit, forcing them to revisit questions many had long thought answered, such as how to tame disruptive boom-and-bust cycles. ...

"We could be looking at a paradigm shift," says Frederic Mishkin, a former Federal Reserve governor now at Columbia University.

That shift could change the way central bankers do their job, possibly leading them to wade more deeply into markets. They could, for example, place greater emphasis on the amount of borrowing in the economy, rather than just the interest rates at which borrowing is done. In boom times, that could lead them to restrict how much money various players, ranging from hedge funds to home buyers, can borrow.

D.C. area foreclosures double year-over-year

From last Wednesday's Washington Post:

The number of Washington area homeowners in foreclosure has more that doubled in the past year, according to a report to be released Wednesday that shows the problem remains most acute in a few counties and could get worse as more borrowers fall behind on their payments.

About 2.7 percent of local borrowers are in the foreclosure process, meaning that the bank has started the legal process to take back the property, according to the report by the Urban Institute, a nonprofit policy research group based in Washington. That was slightly below the national average of 2.9 percent.

But that is up from about 1.4 percent in June 2008 and 0.5 percent in June 2007, according to the report. (The report excludes Howard and Anne Arundel counties.) ...

But the problem is far worse in three counties: Prince George's, where 5.2 percent of borrowers are in foreclosure; Charles with 3.9 percent; and Prince William with 3.7 percent. These areas had high concentrations of minority borrowers who were more likely to take out subprime loans, according to the report.

Cash for Clunkers cost $24,000 per car

Edmunds.com has analyzed the car sales numbers during the Cash for Clunkers program and estimated that the marginal cost was $24,000 of our tax dollars for each new car sold:

A total of 690,000 new vehicles were sold under the Cash for Clunkers program last summer, but only 125,000 of those were vehicles that would not have been sold anyway, according to an analysis released Wednesday by the automotive Web site Edmunds.com. ...

The Cash for Clunkers program gave car buyers rebates of up to $4,500 if they traded in less fuel-efficient vehicles for new vehicles that met certain fuel economy requirements. A total of $3 billion was allotted for those rebates.

The average rebate was $4,000. But the overwhelming majority of sales would have taken place anyway at some time in the last half of 2009, according to Edmunds.com. That means the government ended up spending about $24,000 each for those 125,000 additional vehicle sales.

The average rebate value mentioned above seems like bad rounding. It appears the average rebate was closer to $4,348. Here's the math:

$3 billion overall cost ÷ 690,000 cars sold = $4,348 per car total cost

(690,000 / 125,000) × $4,348 = $24,000 per car marginal cost

In an example of regulatory capture (government regulators protecting the industry they are supposed to regulate), the Department of Transportation is defending Cash for Clunkers (i.e. "Car Allowance Rebate System") by saying that it was good for the auto industry:

"It is unfortunate that Edmunds.com has had nothing but negative things to say about a wildly successful program that sold nearly 250,000 cars in its first four days alone," said Bill Adams, spokesman for the Department of Transportation. "There can be no doubt that CARS drummed up more business for car dealers at a time when they needed help the most."

Note that what's good for car dealers is not necessarily what's good for the overall economy, just as what's good for Realtors is not necessarily what's good for the overall economy. Like the first-time home buyer tax credit, Cash for Clunkers is nothing more than wasteful corporate welfare.

The White House has come out with a weak, short-term-oriented defense of the program. Notice, however, that for the most part the left-wing economics bloggers who are usually quick to defend the White House against faulty economic reasoning (e.g. Paul Krugman, Mark Thoma, Calculated Risk) are remaining silent on this one. In fact, left-leaning economist Jeffrey Sachs is out with his own criticism of Cash for Clunkers' supposed climate benefits. Sachs actually makes the mistake of measuring total cost, rather than marginal cost, so the program is actually 5.5 times more wasteful than the numbers he complains about.

Just like the first-time home buyer tax credit, Cash for Clunkers is a handout of our tax money to the special interests who lobby Congress.

What does a median-priced house look like?

The median price of a house in the United States is roughly $175,000. Here's what a house at that price looks like in different parts of the country.

Shoddy construction

Discussing a recent New York Times article about shoddy condo construction during the boom, the Wall Street Journal's "Developments" blog writes:

The story about shoddy construction during the boom isn’t just a NYC tale. As M.P. McQueen reported in the Journal this summer, the furious pace of home building from the late 1990s through the first half of this decade contributed to a surge in defects. It caused shortages of both skilled construction workers and quality materials. Many municipalities also fell behind inspecting and certifying new homes.

The sheer volume of new buildings that went up during the condo construction boom is the main reason for the increase in defective buildings, lawyers and engineers told the Times.

So one would expect to see more problems in other cities that experienced a condo boom recently.

I doubt this is just a condo problem. It's something I've worried about when I eventually buy a home. So many homes were built during the boom, I bet many of them were rushed. I also bet that the increased demand for construction workers during the boom led to a drop in the average skill of the people hired to do the work, with many of them unable to even speak English. On the whole, houses built during this decade may be of inferior quality to houses built previously.

Government intervention added 5% to home prices

Here's a summary of the analysis from Goldman Sachs:

Uncle Sam’s interventions in the housing market have pushed home prices 5% higher on a national average than they would have been otherwise, Goldman Sachs estimates in a report released late Friday. ...

But these artificial props won’t last forever and may have created a false bottom in the market. “The risk of renewed home-price declines remains significant,” Goldman economist Alec Phillips writes in the report, “and our working assumption is a further 5% to 10% decline by mid-2010.”

Federal government policies encouraging loan mods have reduced the supply of homes on the market temporarily because it takes months for loan servicers (the firms that collect mortgage payments) to figure out which borrowers qualify. ...

Goldman estimates the tax credit has boosted sales by 200,000 units. ...

Mammoth purchases of mortgage securities by the Federal Reserve appear to have held home mortgage rates about 0.30 percentage point lower than they would have been, Goldman says. Those purchases are due to be phased out in next year’s first quarter.

Thanks to Kahner for pointing out Calculated Risk's response:

Based on Goldman's estimates, the first-time home buyer tax credit probably cost around $80,000 per additional home sold. Ouch.

Forget Wall Street, I think Congress needs a salary cut.

Classic!

I've heard that financial journalists sometimes get jealous of the Wall Street tycoons they cover, but this is ridiculous:

Apparently CNNMoney.com staff reporter David Goldman wants his pay cut, too. My advice to Time Warner is go ahead, be generous, give the guy what he wants.

MarketWatch: Kill the Credit

MarketWatch Washington bureau chief Rex Nutting argues against renewing the first-time home buyer tax credit:

The tax credit is an extremely ineffective stimulus, and like the TARP, it mainly rewards the very people who got us into this mess. ... Also, the tax credit gets the economic incentives all wrong. ...

The National Association of Realtors says about 2 million new buyers will take advantage of the subsidy this year, but the real-estate lobbying group admits that the vast majority of those buyers would have bought a home without any subsidy.

Most of the subsidy is wasted. ... It's expensive, but the worst thing about the subsidy is that it doesn't address the issue of oversupply, which is the main reason prices have fallen so much.

Most first-time buyers move from renting to owning a house. That subtracts one home from the vacancy list, but adds an apartment. The net change is zero. There is little gain for the economy.

In the second quarter, a record 4.4 million apartments were vacant (a record 10.6% of all units) and there were 1.9 million vacant dwellings that typically were occupied by the owner. The housing problem in America isn't that home prices are falling; it's that there are so many vacancies that prices must fall. Incomes did not rise as fast as home prices did, so many families simply can't afford current prices. The laws of supply and demand have not been repealed. ...

The tax credit is designed so a buyer can use it for a down payment. Combined with another flawed government plan to recreate subprime lending inside the Federal Housing Administration, the tax credit encourages more buyers to put less of their own money down.

The one thing we know about foreclosures is that they are much more likely if the owner has no equity. So the tax credit, which was designed to reduce foreclosures by helping to prop up prices, actually will lead to more defaults as already stretched buyers lose their jobs.

Remember, the first-time home buyer tax credit is costing $43,000 for every extra home sold. That's a massive waste of your money just to transfer an existing home from one person to another.

HUD unexcited about extending the tax credit

The secretary of the Department of Housing and Urban Development (HUD) appears unexcited about extending the first-time home buyer tax credit:

The nation’s top housing official expressed doubt over the need to extend the $8,000 tax credit for first-time home buyers, and said that the Obama administration was reviewing whether the additional cost of extending the credit was worth any benefit in home sales.

Shaun Donovan, the secretary of the Department of Housing and Urban Development, told a Senate hearing on Tuesday that there was “clear evidence” that the tax credit had benefited the housing market. But he said that the “real issue” in considering an extension was whether an extension was worth the cost to the government in lost tax revenue.

Note that Calculated Risk estimates that the first-time home buyer tax credit costs about $43,000 for every extra home sold:

Here is the math: 1.9 million buyers qualify for the credit (the NAR estimates between 1.8 and 2.0 million) = $15.2 billion.

The NAR estimates the tax credit resulted in 350 thousand additional purchases. So divide $15.2 billion by 350 thousand = $43,000 per additional home. And the numbers will get worse if the program is extended.

The credit also appears to be vulnerable to tax fraud:

The Internal Revenue Service is examining more than 100,000 suspicious claims for the first-time home-buyer tax break, another sign of potential trouble for the soon-to-expire program.

It's a waste of money, poor economics, and vulnerable to tax fraud, so of course Congress will renew it.