Tuesday, August 24, 2010

Homebuyer tax credit didn't benefit homebuyers?

At least one analysis of the homebuyer tax credit calls it a total scam:
The Realtors backed it… the home builders backed it… the mortgage bankers backed it… virtually anyone with an financial interest in residential real estate transactions backed the Homebuyer Tax Credit (and it’s expanded extension) and now that the program is finally complete and a whole host of indicators (NAHB builder sentiment, pending home sales, existing home sales, home prices, etc.) suggest that the its effects were at best temporary, we can see fairly clearly that this policy was a scam of epic proportions benefiting few and costing many.
Here's what you get for trusting the government to make things cheaper:
Many of the homes purchased with the credit have already declined in value in excess of the credit’s maximum $8000 benefit (i.e. a mere 2.5% decline on a $350,000 home) leaving many unwitting home “buyers” in the cruel predicament of sinking in a quicksand of asset price deflation for simply having jumped for a slight nibble of the government’s meager tax carrot.
Well if the actual homebuyers didn't benefit from this, why would the government enact such a policy? Surely someone must have benefited. Oh, that's right. I could have told you right from the beginning:
Realtors, home builders and mortgage bankers…. some of the most notable culprits of the housing bubble years… all walk away cleanly skimming the proceeds coming from the transactions of an estimated 2 million temporarily stimulated home purchases.

It should come as no surprise that these were the very same industry groups that worked tirelessly lobbying to enact this failed policy… it was a simple exchange… your tax dollars to their wallets.
No, it really shouldn't come as a surprise. This reminds me of two things I learned from Adam Smith: 1) business people tend to know their own interests better than the general public knows their own interests, and 2) business people are also very good at convincing the government that their interests are actually in line with public interests, when this is in fact not the case. Not much has changed in the two and a half centuries since Smith.

There's one other fundamental principle that I remember from Wealth of Nations which is relevant here. The amount of profit that a producer requires is not determined by consumer demand. Consumer demand only determines the price at which he is able to sell. If he is unable to sell at a price that will get him sufficient profit, he'll just have to do something else. On average, this is a normal part of a fluid economy that should not be looked down on. There is nothing wrong with giving up a certain venture when it becomes irrational to keep holding on. However, what often happens is that the government will provide subsidies, for instance a homebuyer tax credit, which allows producers to sell at a higher price and thus make their required profit. This encourages them to continue in what would otherwise be considered irrational economic activity.

The problem is that when it comes to public interest, we somehow see certain goods (such as houses) as having some sort of absolute value. Everyone just has to have one! And people accuse capitalists of being materialistic. The reality is that every good has only relative value. It's only valuable if it's valuable to you. We all know this in our own daily lives. For instance, I would never pay as much for coffee as my brother, or my uncle. This is not a character flaw in either party. But now suppose that in this troubled economy, I were forced to pay my brother so that he could keep buying coffee...

That's pretty much the state of things in this country. And who wins? No, the buyers don't win. The people who stand to gain a profit are the sellers.

1 comment:

  1. Speaking of which, I haven't gotten my coffee money from you in a while...


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