Homebuyer Tax Credit: Worthless


Since we all collectively bet so hard on housing over the past several years, it’s only understandable that a lot of the hopes for economic recovery rest in stabilizing the housing market. Even if housing affordability is a good thing, and the idea of housing as a wealth store was a bad idea, policy makers still want home prices to rise. Hence the stimulus includes a $15,000 home buyer tax credit.

Too bad it won’t do anything according to econ prof Kash Mansouri. His explanation is a bit technical, but Free Exchange has a concise explanation

The basic idea is this—housing markets aren’t clearing. Prices are above their market clearing level, leading to an inventory surplus. The boost to demand provided by the credit, then, would increase sales and draw down inventory, but not by enough to clear markets and provide upward price pressure. In short, Mr Manshori believes that homes are more than $15,000 overpriced, so the credit would merely reduce the amount by which prices would need to fall to clear markets.

So it’ll offer a modicum of relief to new home buyers, but won’t accomplish the goal of reflating housing. Sad as it may be, we may just have to ride this one out.