Wednesday, October 21, 2009

Don't Extend Cash for Clunker Houses

The Federal Reserve is on track to spend (read print money) to buy $1.25 Trillion in Government Agency bonds (Fannie, Freddie) in an effort to keep mortgage rates down - subsidy number 1. The government is giving away $8,000 to first time home buyers if they close before November 30th, 2009 - subsidy number 2. The mortgage interest deduction, subsidy number 3. The capital-gains exclusion, subsidy number 4. Fannie and Freddie provide liquidity to the market, but are guaranteed by taxpayers, subsidy number 5. The FHA and their 3% down mortgages......subsidy number 6.

My point.....the government has helped to create the housing bubble and they are attempting to do it again by threatening to extend or expand the tax credit for buying a home (Democrats and Republicans support this). The linked to Barron's story has the following analysis from the Brookings Institute:

According to estimates by Ted Gayer at the Brookings Institution, each additional home sale generated by the $8,000 first-time homebuyers' tax credit actually costs the government $43,000.

How's that possible? Gayer figures that of the 1.9 million homebuyers that will get the $8,000 tax credit, 85% would have bought a house anyway. The price tag of $15 billion -- about twice what Congress had intended -- he reckons will result in approximately 350,000 additional home sales, at a price tag of $43,000 for each additional sale.

That's nothing compared to the tab for a possible one-year, $15,000 tax credit for all home buyers (except those with high incomes.) Gayer figured that would cost the Treasury $73.9 billion, which he estimated would increase house sales by a total of 253,000. Each of those extra home sales would cost the Treasury $292,000 ($73.9 billion divided by 253,000.)

We should not extend this tax credit subsidy.

Scott Dauenhauer CFP, MSFP, AIF