Hypothetical Mean

Commentary from an Actuarial and Economic Perspective

Burning Down the House

with one comment

Update, 2/22:  The provision referenced in this post was removed in conference and did not become law.

The $15,000 homebuyers credit in the Senate version of the stimulus bill needs to be opposed.  The CBPP and Kash Minori have this exactly right.  What drives me to post is that there are even more reasons to oppose it than they suggest.

1) The credit could increase the supply of houses because it applies to existing homeowners. Risk-averse owners looking to “trade-up” are likely to put their homes on the market before entering the market themselves.  This would not only undercut the rationale for the credit, it might even make the housing situation worse.

2) For most owners, the price of your house today isn’t nearly as important as the price of your house at the time you wish to sell.  Temporarily propping house prices up today — which I don’t think this credit will effectively do — does nothing to change the price of houses tomorrow.  At the end of 2010, we’ll be in basically the same position we are today; the bill just encourages likely 2010 sales to get bumped forward in time to 2009.

The one possible exception is the degree to which this credit can draw in marginal new purchasers, increasing the demand for homeownership in total.  If we assume that home prices have not yet bottomed out, however, the more likely scenario is that there just aren’t many buyers for whom the credit itself is the difference between successful home ownership and foreclosure.

3) The credit may destroy economic well-being. Here’s how.  Let’s put some numbers with this, and suppose that I’d have to be compensated at least $10,000 to go to the trouble to move.  This credit may, therefore, induce me to move.  I’ll be $5,000 better off.  However, the government is $15,000 worse off.  As a nation, therefore, we’ve just burned $10,000, net, to churn homes and disrupt lives.

The CBPP and Kash have very good, first-order reasons to oppose the credit, mine are secondary.  The main point is that we are going to spend a lot of money to “boost” the economy.  Let’s be sure that these “boosts” are cost-effective and actually help people.  We have enough time to make sure we do that.


Written by Victor

February 10, 2009 at 2:49 pm

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