There may not be much the federal government can do to halt the housing market's slide. The measures that have been tried so far -- in particular, a generous tax credit for homebuyers -- have not succeeded in turning around sales that are now the weakest seen in 15 years.
Shaun Donovan, the secretary of Housing and Urban Development, wouldn't rule out the idea of extending the tax credit during an appearance on CNN's State of the Union on Sunday. The credit, which expired in April, offered homebuyers assistance of up to $8,000. The idea: Lure folks back into the housing market by giving them a hefty break on their taxes.
But White House press secretary Robert Gibbs said Monday that the idea of reviving the credit "is not as high on the list as many other things are."
Distorting Effects
Many housing experts say that's just as well. The credit has been popular and appeared to goose sales until its April 30 expiration date. But economists argue that its main effect was not to increase the total number of sales, but simply to change their timing. People rushed to sign contracts in time to qualify for the tax break, leaving the market in the doldrums ever since.
"The tax credit did distort the home sales patterns over the last year," says Celia Chen, director of housing economics at Moody's Analytics, a research firm. "The credit had a limited effect, just pushing forward buying rather than increasing demand. You can see the influence of that in the severe drop-off of home sales after the credit expired."
Over the long run, the credit may even have made things worse. Some sellers may have been misled into thinking conditions were improved and that therefore they should put their homes up for sale, contributing to the problem of excess inventory.
Throwing Money At The Problem?
This is no small matter. An initial version of the credit program was created by Congress in 2008 and was then expanded and extended twice last year. All told, it has cost taxpayers nearly $25 billion, and counting. According to figures provided by the Treasury Department, more than 3.5 million individuals and families had claimed credits as first-time homebuyers through July 24.
Even putting aside fraud -- and there have been some embarrassing revelations of people in prison and other scam artists getting paid millions in claims -- some economists say the program as a whole was a big waste of money.
Howard Gleckman, a resident fellow at the Urban Institute, calls it one of the worst tax policy ideas in Washington. "To throw more money at an already wildly subsidized housing market just doesn't seem to make sense," he says.
Boosting Sales And Prices
Not everyone is so critical. Jed Smith, an economist with the National Association of Realtors, says the tax credit was a "net positive." He estimates that it led to an additional 300,000 homes being sold.
Beyond improving sales, Smith says, the credit helped shore up housing prices. "The tax credit helped stop some of the panic, helped stabilize the market after this panic selling," he says.
Still, Smith predicts that the sales figures for August will show a continued decline, in large part because the people who might have been this season's buyers rushed their purchases in the spring to qualify for the federal help.
"It would be surprising if August sales didn't go down a little bit, because we're still working our way through the tax credit," Smith says.
Not Enough Demand
Smith predicts that things will start to pick up this month. But the market won't be going gangbusters until job creation improves, he says. People aren't in a mood to buy, despite the fact that home prices have come down since the tax credit expired -- by more than $8,000, in many cases -- and interest rates are at historic lows.
"Interest rates are falling off the table," says Mike Larson, a real estate analyst with Weiss Research, an investment firm in Florida. "Look back to the Wright brothers' day, and we haven't had interest rates this low."
But a 4.5 percent mortgage rate is still not providing enough of an enticement, given overall economic conditions. "If you don't have a job, I don't care if you're at 8 percent or 1 percent," Larson says.
It's not just that people have grown gun-shy about taking on debt. After having left the floodgates open too long with easy credit, lenders have become much more restrictive about who can qualify for a home loan.
"Even with another homebuyer tax credit, one of the real problems is that lending standards are just so tight," says John Walsh, president of Total Mortgage Services, a brokerage firm based in Connecticut. "There's a lot of people who would love to buy a home, but your pool of qualified borrowers has shrunk considerably in the last two or three years."
Too Much Supply
If there are not enough qualified buyers, another factor dragging down the market is that there are too many houses for sale. There are at least eight months worth of homes on the market now, says the Realtors' Smith -- meaning that even if no more homes are put up for sale, it would take eight months to sell off the ones that are already out there. "A better market would be six," Smith says.
Is there anything out there that can turn this thing around once and for all as a policy response? My answer would be no.
But still more homes are coming up for sale. According to Moody's Chen, banks foreclosed on a large number of properties during the first half of this year, and many of those are just coming on the market now. More distressed properties will pull down prices in general.
"We've been expecting prices to continue falling," Chen says. "It does feel like it's the double dip in the housing cycle."
If there is a double dip -- a second prolonged slide in sales and prices -- it may have been "policy-induced," Chen says. Some economists believe that the tax credit actually contributed to the oversupply problem by making things appear temporarily rosy and pulling more sellers into the market, chasing after too few buyers. Surveys conducted by industry groups and academic experts, meanwhile, suggest that fewer than 1 in 5 homebuyers were motivated primarily by the tax credit in deciding to make a purchase.
Enticing people who are not already out looking thanks to falling prices and historically low interest rates will take not just $8,000 but perhaps tens of thousands of dollars in federal aid per purchase, suggests Larson, of Weiss Research.
"Is there anything out there that can turn this thing around once and for all as a policy response? My answer would be no," Larson says. "Politically, it's hard for policymakers to admit that."
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