To clarify, I'm not suggesting pulling stimulus - I'm suggesting moving it from artificially propping up home prices to job creation. The tax credit really isn't helping people buy property, though - and that wasn't really its purpose despite its marketing. The goal of the tax credit was to basically create a soft landing in the housing market. Prices are going to go to where supply meets demand, but there was a concern that it was going to go to there very, very fast. The tax credit slowed that process. What the tax credit is doing now is just letting sellers raise their prices by $8k. What needs to happen is for those sellers to realize their properties aren't worth as much and lower their prices - and we've seen some of that over the last two months. That is what is ultimately going to create a healthy housing market. That depends - it doesn't work universally, but it certainly can. It's the same concept as cash for clunkers - you're taking old crap off the market and replacing it with newer stuff. Politically, it's generally unfeasible - though it's an idea starting to take hold in places that are really a mess like Detroit and other places: http://www.nashuatelegraph.com/business/664306-192/detroit-considers-plan-to-raze-neighborhoods.html http://www.allbusiness.com/government/government-bodies-offices-regional/14499107-1.html I agree with this. But the problem with a tax credit is it just delays the market finding its actual equilibrium. And homebuilders (or any business) aren't going to make long term decisions based on a temporary tax credit. Much better to simply get prices down to their equilibrium so you can start building a healthy economy. What we've had for the past year was necessary due to the financial crisis, but it hasn't contributed to getting the economy on stronger long-term footing.
I'd like to make use of those rates, but I don't have the confidence that I can sell my current house. Perhaps I'll pull an imadrummer and rent it.
To make the idea workable, decent livable homes would have to be torn down too. I'm not sure how that would work because it opens the possibility of banks trying to outwait the others to be one of the last homes standing. I haven't studied the idea much, so your thoughts would be appreciated. The possibility of deeper housing death spiral is real to me. With mortgages being non-recourse in most states, what's to say even more people won't make the rational decision to just leave and mail their keys to banks? I think the factors preventing that now is an individual sense of moral decency and the idea that there is some or marginal effort by the government to improve housing prices (the thought that it'll get better soon).
The problem is that we have a housing glut, and also a commercial real estate glut, and its going to take awhile for prices to find an equilibrium and to soak up that glut. Things aren't looking very good for the next few years for my profession.
Yeah - I'm not sure the best way to do it, frankly. Definitely a concern. One thing Fannie/Freddie have done is to start saying if you do this, you won't be eligible for ANY mortgage for many many years. I don't know the details, but apparently they said something to that effect a few days ago to address this issue. Absolutely - I just don't think the tax credit really addresses that. All it did was punt the problem down the road while costing a lot of money. The glut is one of the reasons I suggested destroying the crappy housing, but as noted above, I'm not sure the logistics of making it work.
Ok, I speak from this as someone who has been in the market for buying a condo in the past 18 months. I've been looking at various properties, inventory levels, prices, interest rates and such. The neighborhood I've targeted was Williamsburg, Brooklyn. When the bottom fell out, it took a while, but prices very slowly declined. Developments were finishing and there are whole towers that were unoccupied. The tax credit came into effect, but still it didn't really get people to move. What got people to move is when cost per square foot dropped from about $750 to $600-$650. Then what happened is all these people started buying right around Jan - April - taking adventage of the tax credit. Now...the credit is over and buying has once again hit a stand still. Prices have been flat and the costs per square foot are about the same. I have not seen the prices go up during the tax credit, they in fact went down. The have been flat since May. Interest rates have been flat. Inventory is slowing being reduced, but the tax credit definitely filled a lot. Here's why. When you buy a property, you look at what sort of rent you can command in a given year divided by the loan. You get some percentage somewhere between say 2% - 10%. Now, if that percentage comes out to be at the interest rate or lower - you are in trouble if you buy that place...because that means if the property value declines more than your down payment minus closing costs you can't sell - your owe more than the property is worth. On 10% down that means a 5% decline in property value and you're in trouble (because of closing costs / broker fees). If you end up in that situation, and you now lose your job, you are in big trouble. Because if you rent out your property, you won't be able to cover the mortgage. Now, if it comes up higher than the mortgage + property tax + maintenance, you are golden because if you have to rent it, you can cover all that stuff even if the property value drops a bit more. You have more security. So what that $8,000 tax credit does - it effectively lowers your risk since you got a $600 a month more cushion between your rent and your mortgage. that's huge man. That means you are more likely not to get screwed if you lose your job for a year and have to rent our your property. It's not propping up prices, what it does it gets people to buy homes and reduce that inventory. And heres the thing if prices fall too quickly, guess what - foreclosures will increase. What we want to happen is to keep people buying, which holds the market up until employment drops and incomes rise which will then naturally start to drive the housing market. Then you cut the tax incentive. But only then. Instead of letting the market drop to equilbrium, wait for the equilbrium to overtake the current state - which won't take long once a sustained recovery gets under way.
things aren't going back to "normal". Right now, the best we should hope for is a return to the way they should have been.
Per your experience, Lou, it looks like the credit did not have much of an impact in your neighborhood until it was set to expire. At $600/ft I suppose you're looking at $300K to $600K for a condo -- so it's not a surprise market factors had a stronger impact. An $8K enticement to buy a condo that later lost $75K to $150K (going on a $150/foot decline on a 500 - 1000 ft condo) doesn't seem like it was ever a great favor. Best to let the market reach its own equilibrium and allocate the funds elsewhere if that's warranted. Not sure where you're getting $600/mo on $8000 (unless you're assuming people bank it to provide a one year cushion -- which I doubt is what most do). There's already a hefty tax advantage to ownership through the opportunity to deduct interest, the gov should not be subsidizing your buy too.
Poor Krugman, his entire economic viewpoint is being discredited, Europe is going in the other direction after adhering to his views led to collapse. All he can do is plead for more of the same, the definition of insanity. Ask yourself, if you want to increase your wealth, do you go out and buy a bunch of stuff? That's the Krugman philosophy, spend money and wealth will grow. Such spending just leads to nothing but debt and wealth transfer, it does not increase the size of the pie. Productivity and wealth creation comes from abstaining from buying stuff, it comes from saving and investment. If Obama were to abolish corporate taxes and capital gains tax today, investment and growth and hiring would explode. It's so simple, yet unthinkable to those in power today.
If no one buys stuff and just saves all their money well then people lose their jobs because no one is buying stuff this in turn lowers the value of their investments since no one is buying stuff and companies aren't making a profit. Its a complex system.
I'm all for the Gov't subsidizing my buying a condo. The goal is it gets me to buy, lowers my risk, lowers foreclosures...it's better for me, and the bank. $8k off my taxes is worth a lot more than $8k from the closing price. The reason is this. If I know I'm getting an $8k deduction, I can claim more allowances and thus my monthly paycheck goes up but my tax liability doesn't. I get the $600 a month by 8000/12 months. That's why it's more valuable. Because it's a lot more cushion the first year than getting $8k off the purchase price which gets spread across 30 years. I can use that $8K as a buffer - if I lose my job and property values decline, I just have to hope that rental value doesn't decline by $600 a month as well. So long as that holds, I have 1 year where I can rent it out at $600 less than I predict I can today and I'm still covering a potential mortgage. Will prices decline further now that the tax credit is gone. It might, but if it does, you're going to get a rash of foreclosures as people abandon properties that have negative equity and that's just going to make things worse since the credit market will tighten and banks lose even more money. We have to keep the housing market up. And we do need jobs stimulus. I think boasting consumer spending through tax rebates and infrastructure projects are definitely good to do. 3 prongs to stimulus - housing, employment through gov't projects, and driving consumer spending up. Those are the 3 pillars of our economy. As soon as the recovery becomes self sustaining, the gov't will have to end stimulus and become more austere to pay for the deficit. The problem we ran into is that Bush ran a deficit during a boon. If he had not cut taxes and continues to use the excess revenue to pay off our debt, we'd be in a much better fiscal position instead of facing an 11 trillion dollar deficit.
I just don't see how this is going to be possible. Pretty much all of the elements for paying an excessive amount of money for a house have been removed. The number of people who can get loans has been drastically reduced due to tighter lending standards. Furthermore, people don't even have the money they used due to high unemployment. No one expects home prices to boom any time soon, so speculation is not running rampant like most of the past decade. A glut of homes available thanks to foreclosures that many analysts estimate will take 5-10 years to clear. Over the next decade the over-privileged baby boomers are going to be moving out of their giant homes that the younger, less privileged generation won't be able to afford at current prices. Interest rates are going to have to go up some time. As prices continue to drop you'll have even more people walking away from their mortgages. I'm sure leaving other things out. But with so many factors stacked against the housing market, how is any stimulus going to overtake the simple fact that supply has sky-rocketed as demand has plummeted? As I mentioned earlier, there is already stimulus right now with interest rates being at an all time low. Five to ten years ago, low interest rates like this were enticing people to purchase homes they couldn't afford. That's not happening anymore. Partly because the means are simply no longer there, but also because people have become wise to the fact that the "American Dream" of owning a home is just a myth. I would be shocked if home prices don't take another dip, and I don't think any amount of stimulus the government can throw at the problem will fix it. I agree that hard times are ahead.
Discredited? How exactly? If anything all of his skepticism about the Euro and about the impact of austerity (check Ireland...) is being proven exactly correct. The euro proved untenable becuase the poorer countries couldn't use monetary policy to survive crises, and the related "austerity" measures mean decades and decades of lost growth and are very obviously depressing economies. He said this 10 years ago. Guess what has happened. My god, this is incredibly dumb. It is also the exact opposite of being true. The calcification of capital doesn't cause economic growth IT CAUSES THE OPPOSITE - you are essentially telling us that 2-2 = 5. Who taught you this? I am honestly interested in knowing how you got to this information and how people formulate views like this. I mean, it is just so incredibly at odds with anything logical even without an economics background one should realize that stuffing money in your mattress doesn't magically create jobs. And you top it off with the classic chestnut of wignut econ 101: We need to get our fiscal situation under control by reducing government revenues!.
