Nick Timiraos’ post in The Wall Street Journal ‘s Developments blog posited that the new home buyer tax credit created uncertainty and unpredictability—precisely why  another round of credits should not be considered now:

“The tax credit’s biggest shortcoming may have been that it gave everyone a false sense of security that the housing market was fixing itself when all the tax credit did was gloss over much deeper rot within the system.”

Here’s another reason to consider why the new home buyer tax credit failed: It was a program that threw money at the very source of the sickness in housing.  It didn’t fix the sickness and it possibly made it worse.

The disease that housing contracted was that too many households who should not have been made homeowners became homeowners during the housing boom.  New homeowners grew in unprecedented numbers aided by untenable credit all resting on the notion that home prices would continue to rise at the rapid rate as had been the case while home ownership was bounding upwards.

Home prices began to retreat in 2006, which enabled the housing epidemic to incubate in its host.  The unwitting host’s fever (foreclosures) began to rise as mortgage resets and the riskiness of liar loans started to surface.  And then home ownership began a free fall that hasn’t necessarily abated.



The irony of all ironies is that the stimulus threw money into housing directed at new home buyers, the very households on the cusp of home ownership.  These households then bought entry level housing, including both new and existing homes.  The increased sales gave many the false impression that the bottom had been reached.  In many cases, these new home buyers purchased the foreclosed homes of the prior households who were once proud new homeowners.  The result?  Home ownership declined at a lesser rate but it still declined.

Another result was to cause the housing market to be overly focused on entry level housing.  Home prices are a reflection of what is sold, and since 2008 the volume of homes closed in the U.S. dramatically shifted towards median and lower price points.  This shift in price points only amplified the extent of reported price declines.

We would have had declining home prices regardless of the shift, however, because the effect of declining home ownership is to subtract from demand while at the same time adding approximately 800,000 existing homes to supply for every 100 basis points in declining homeownership.  This is the basis for the 1.6 million “fewer homes needed” estimate that was reported in this week’s Bloomberg Businessweek.  The patient is sick and needs time to recover.  It isn’t clear that options the Administration is considering, as reported in yesterday’s Wall Street Journal would really help or would simply cause more uncertainty and false hope as Timiraos suggests.

What we would suggest is this: Just don’t do anything to make the patient worse.  For example, elimination of the mortgage interest deduction, as a political bargaining chip and/or a gesture towards deficit reduction, will cause prices to decline further and will freeze activity at above median price points.  If we want housing to improve and home ownership to stabilize, we need to be thinking about how to stabilize pricing and encourage home sales at all price points.  One can argue over whether the mortgage interest deduction should have ever existed, but the reality is that entire generations of home owners have come to rely on it, and now would be the worst time to consider any substantial modification when what we need most is stability.

For additional market-level data and analysis please visit our website at http://www.housingintelligence.com.  For more detailed information on these and other indicators, please visit the following links: