Extending and Expanding the Homebuyer Tax Credit

The new and beefed up homebuyer tax credit will likely help home sales continue to improve, but does it help in a temporary or long-term manner?  While a temporary boost makes us all feel warm and fuzzy, the real focus of any economic program needs to come back around to long-term fixes.

An area of the expanded program I have a real problem with is the extension of the credit to those that already have a home.  They need to have lived there for at least five years, but I don’t know how this matters much when you’re giving someone money to take one home off the market and put another one right back on.  This may stimulate home sales and inflate prices a bit, but it actually has a net zero effect on home inventory.

Another conceptual problem that I have had with the credit from the first time it rolled out is that we are trying to fix a market that suffered inflated prices due to outside manipulation by trying to stimulate inflated prices with outside manipulation, because we liked the higher prices better.  Higher home prices made us all feel wealthier and to the extent that you could take a loan on the inflated equity on your home and spend that cash, it truly did inflate your wealth.

The problem is that the wealth created by inflating home prices wasn’t real wealth, it was a glitch in the system that distorted the market with inflated, but unsustainable prices.  To the extent we are trying to restore that false market, the homebuyer tax credit only delays the day that we have to face the real market.

The long-term fixes to the market are the ones that are taking place on the lending side of the equation with tighening lending standards and honest loan evaluation.  More conservative valuation estimates for homes.  Making loans that will most likely be repaid, not making loans with the intent to refinance on a higher valuation in a few years.

The government throwing credit money around to help home sales will mostly leave us with temporarily inflated home prices and a bigger tax bill to pay in the future.  As if there weren’t plenty of other plans for spending all of our future income.