In fact, an examination of the numbers shows that the government was actually paying people to buy houses. When the tax credit was implemented, the average home price in the U.S. was $178,000. Mortgages were primarily provided through the F.H.A. at that time, which required a maximum of a 3.5 percent down payment. Therefore, on the average home, a down payment of about $6,200 was required. The first-time home buyer's tax credit was $8,000. The result was that buyers were handed a deed to a house and a check for $1,800. We have seen that movie already and know how it ends.
Based upon this tax credit program, which steals transaction volume from subsequent periods, was it any surprise that home sales plunged 27 percent after the expiration of the program?
I'd not seen the math before, but I think he's quite right in his observation. And every one of the sellers was enabled to go on about his life, armed with home equity or at least freed of his debt, perhaps to buy a move-up house in a better location.
Later in the article, he continues,
GIVEN THESE CONDITIONS, economists have projected a growing likelihood of a double dip in the national housing market. A double dip would have negative implications for our commercial real estate market. Let's connect the dots.
We have previously discussed the importance of employment on commercial real estate fundamentals. Small businesses are the leading contributor to job creation and growth in the U.S. The fact is that home equity withdrawal and credit card borrowing are the primary financing sources for the majority of small businesses. Given new regulation in the credit card industry, which was ironically initiated to "protect" consumers, credit availability has shrunk and that which is available is more expensive than it was. Therefore, small business has restricted access to this form of financing. This places even more importance on home equity.
To the extent that home equity grows, it provides existing and potential small-business owners with a source of financing for job creation. Additionally, home equity creates a "wealth effect" that stimulates personal consumption. With consumer spending making up nearly 70 percent of our gross domestic product, this has important implications for our economy at large. Second-quarter 2010 G.D.P. growth was adjusted downward from an initial estimate of 2.4 percent to just 1.6 percent. This is far below the 6 to 8 percent growth rate normally seen at this point in a recovery. An increase in consumer spending would lead to healthy G.D.P. growth.Do we really want to repeat this boom-bust cycle business again? Do we have a reason to think that "this time it will be different" somehow?
Seems to me that we'd be better off if we followed Mason Gaffney's advice in "How to Thaw Credit, Now and Forever." While you're at it, take a look at "The Great Crash of 2008" and "After the Crash: Designing a Depression-free Economy. All are available at http://www.masongaffney.org/.
Or maybe you'd like to see us repeat this last few years again. I know: you'll be smart, and know when to get out of the "housing" -- land -- market, and make out just fine, won't you? It is just the other poor suckers who will suffer next time, right?
If you want to enable and encourage those potential small-business owners, the best thing you -- WE! -- can do is implement policies which bring DOWN the selling price of land and reduce the disincentives to development of well-located sites to something approaching their highest and best use.
The folks who consider their best hopes to be from reaping the appreciation in land values -- be it as real estate brokers, mortgage brokers, title insurance brokers, speculators, "investors," "capital" gains takers -- as well as the credit card companies financing business startups at 22% annual interest -- will not like this much. But they're much less concerned about US as a society than they are about what might be great for their sector. Yes, they have a lot of influence over policy. And until a significant minority of us come to understand the economics of land, and how it can be used as a force for the common good rather than for private gain, they will continue to spend enough to influence our votes, and tell us it is in OUR best interests. Ever heard of hiding behind the widows' skirts? This is a fine example.