If you've seen the movie the "Untouchables" with Sean Connery, you probably remember the line where he says something to the effect of "bringing a knife to a gun fight", only he uses a term that I won't repeat.
Well, that's exactly what Congress is doing with their proposed housing stimulus plan that is making its way through the Senate, they are bringing a knife to a gun fight and they have been now for nearly a year. And that's why the housing market has and will continue to deteriorate.
The latest of Congress' efforts is to provide a 10% home-buyer tax credit of up to $15,000 for the purchase of a primary residence. This would be a tax credit that would not have to be repaid. This is a change in course compared to the previous tax credit of $7,500 that was passed in July of 2008 as part of the Housing and Economic Recovery Act of 2008 in which the tax credit needed to be repaid over a 15-year period.
According to a blog post by CNBC's Diana Olick, the National Association of Home Builders is projecting an increase of 499,700 home sales as a result of the tax credit. And while this may sound promising, the problem is much, much, larger than the solution, and that assumes the "solution" will actually have the intended result.
The assumption is that primary residence buyers, namely first time home buyers, actually have the credit, the capital, and the confidence (job security) to purchase a home. I don't mean to be skeptical, but these are the realities that we are dealing with. Analysts within the real estate industry have been wrong before, I know, it's shocking. Recently NAR's senior economist, Lawrence Yun, made a bold claim that by plunging mortgage rates a full percentage point, we would see an additional 500,000 home sales over a one year period. Well, according to Freddie Mac, since mortgage plunged from 6.20% in October to 5.29% in December, nearly a full percentage point, seasonally adjusted home sales have actually fallen by -3.5% or by 170,000 home sales. Lowering mortgage rates by nearly a full point had no affect on stimulating demand. And no, it's not about affordability either, housing affordability is officially off the charts, in a good sense.
But back to bringing a knife to a gun fight, let's put on our "optimism hat" and assume this $15,000 home buying tax credit does work and we get home buyers off the fence and we get an additional 500,000 home sales over the next year, at the current home sales pace, there are approximately 1.3 million too many homes for sale in order to have a balanced market in which home values stop falling. In other words, while the NAHB projections could be correct, this proposal would still be insufficient in solving the immediate problem facing the housing market which is the fact that there are still going to be too many homes for sale.
More importantly, is that Congress and every other analysis and economist has apparently forgot about the estimated 8 million foreclosures that will be coming to the market over the next four years. Who is going to buy all of those homes? It's not going to be first time home buyers. It's going to need to be real estate investors, you know, Americans that do have the capital and credit, the people with billions of dollars waiting on the sideline for somewhere to invest, but for some reason have been left out of every housing stimulus proposal.
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