The Effects Of The Proposed Housing Tax Credit
Paul Krugman is not a happy camper, denouncing Obama for being politically inexperienced and therefore naive and denouncing Republicans for not wanting to increase government spending. True to form, he also refers to a tax credit for home purchases as being for "the affluent", even though the $15,000 upper limit means that it will benefit the high end of the market much less (For a $150,000 home, it will mean a 10% subsidy, for a million dollar home, it will only mean a 1.5% subsidy).
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.
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.
posted by stefankarlsson at 5:07 PM
3 Comments:
"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."
It might prevent a phenomenon of hikikomori and parasite singles from appearing in the US which happened in Japan. Many people lived with their parents in Japan. But having more hikikomori and parasite singles isn't such a bad thing,
The tax credit will do little or nothing to spur a reduction in inventory since higher income households are the only segment that has a high enough tax liability plus this income bracket tend to be homeowners so little will be gained. What spurs housing sales is lowering credit criteria.
giving loans to under qualified home buyers is exactly what got us in this situation! What good is increasing the number of home sales if the people buying can't afford to pay the mortgage
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