The Effects Of The Proposed Housing Tax Credit
Anyway, what will the effect of that tax credit be? Will it cause house prices to rise? Kash Mansori here argues otherwise, using several charts. And the point, illustrated in the last one, is that because there is so much unsold inventory, all a tax credit will do is to reduce the inventory level, not raise the price. That may be true in the sense that the prices may not (at least not in the near future) rise compared to now, but it will still probably raise house prices compared to the level it would have been in the absence of the tax credit. The reason for this is that while sellers now want to wait for a while longer in the hope of getting a better price, they probably wouldn't want to wait forever. The implicit assumption that Kash makes is that no owner of an unsold home would ever ahree to lower their price, an assumption which I think is unrealistic. And so, inventories would have probably fallen anyway, only this correction will require a smaller decline in price than otherwise because of the tax credit. And so, this tax credit will mean that prices will be higher than if the tax credit hadn't been implemented.
This is not to say that the tax credit is necessarily a good idea, as this delays the restructuring of the economy away from excess dependence on housing. Moreover, the price increasing effect will probably be limited because some of the home buyers will move from their old houses to those newly bought houses, meaning that those old houses will be up for sale, something which in turn means that supply will also increase. The house price increasing effect will instead come to the extent that the demand for vacant homes (from people who now rent, or from young people that still live with their parents) increases.