Miss the Homebuyer Tax Credit Yet?

by JACOB GAFFNEY

By now you've probably seen the news — quarterly sequential home prices are finally going up! What a relief. For a moment, I thought we were in trouble.

In a much less rosy conversation today with Radar Logic CEO Michael Feder, we talked about indices such as the above and the ultimate usefulness provided in today's market. Radar Logic provided a great deal of groundwork for a Morgan Stanley report featured in the September issue of the print edition of HousingWire.

Basically, the research states that not only do properties need frequent, real-time data (quarterly reports today mean information is one month of new news, two months of old), but also data on changes to local economics and the actual size of property. They refer to it as the 'shift-in-mix' scenario. In our feature we break out the four major MSAs from Morgan Stanley and Radar Logic.

So while housing indices are getting much smarter, so are homebuyers.

At this point, the psychological damage is done and first time homebuyers are, well, simply being logical. According to a Gallup poll, one in four Americans are worried about the status of their jobs. So even if they don't fear unemployment, they still fear wage cuts.

At this point, buyers get that if they purchase a home, they will likely be underwater soon thereafter. They know that they can likely get short sales and REOs cheaper than new builds.

They know that without the tax credit they can push for lower and lower prices.

And considering that riding the coattails of the homebuyer tax credit turned out to be misguided because there is little "pull-through" effect, there seems to be only one option to stimulating the market: bring back the homebuyer tax credit.

Perish the thought. The tax credit should be considered one of the most misguided attempts on stimulus by a government bent on spending its way out of recession. In fact, opinion in our space for a very long time has been that the homebuyer tax credit has done more harm than good.

Analysts estimated that July home sales would be bad, turns out they were actually too conservative.

"New home sales are getting to the stage where the distortions caused by the tax credit are fading, and as the smoke clears it is becoming blindingly obvious that underlying conditions are very weak," said Paul Dales, an economist who focuses on the US residential markets for Capital Economics.

In this schizophrenic economy, people would rather pay down their unsecured debt than spend money, and the last thing people want is a mortgage, unless they will get some money out of it.

So, I will make the argument that since bringing back the tax credit is such a fundamentally terrible idea, one that's proven to be a Pyrrhic victory — by that fact alone — it is even more likely to return.

Case in point, a note from Amherst Securities yesterday points out that the Home Affordable Refinancing Program was not as effective as it could have been. This, amid calls for a universal refinance program. The Fed is going forward with quantitative easing in the form of Treasury purchases, which in one way is likely to create volatility through duration risk in the MBS market.

This is based on the observation that within the mix of everything, the last thing the government wants to be is the bearer of bad news. Echoes of the tax credit — this money is well spent; think of how bad it could've been.

Therefore, why not revisit policy?

After all this housing market is stabilizing, according to the Obama administration, so what's the worst that can happen?

URL to Original Article: http://www.housingwire.com/2010/08/25/miss-the-homebuyer-tax-credit-yet