Clunkers and Home Buyer Tax Credit: All the Same Thing 28 comments
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The car clunker program was a huge success. Close to 700,000 cars were sold as a result of the program. The cash rebate was the down payment that was necessary for consumers to borrow more money and buy a car. The clunker concept has now been extended to washing machines. No doubt that the availability of government rebate checks will stimulate demand for these products as well.
It will be very interesting to follow car sales over the next few months. The sales volume will fall, as the stimulus to buy is no longer there. The question will be: “Did the clunker program just steal from future consumption, or has there been a permanent increase in demand that reflects a stronger economy?" My bet is that the demand is going to fall flat. I visited a car dealer on Tuesday and they had not seen a customer. Without the rebate there are no buyers.
There is another clunker-like program that is out there stimulating demand. It is focused on the low end housing market. Given the huge success of car clunkers it is reasonable to assume that this segment of the housing market is being positively influenced by the subsidy. The question here will be whether that stimulus is responsible for the improved housing numbers that have surfaced over the past few months.
The American Recovery and Reinvestment Act (ARRA) of 2/17/2009 created an $8,000 tax credit for first time home buyers. The number of homes that have been sold as a result of this program is not clear at this time. As I drive around my neighborhood, I see many For Sale signs that highlight the $8,000 credit. Until the success of the car clunker program I thought that this incentive was not a significant factor. I have revised my own view regarding its impact on the housing market.
The ARRA established an estimate of $3b as the cost of the housing subsidy. The actual results could vary significantly from that estimate. It depends on how many buyers take advantage of the program. The full $8,000 is available to only a defined group of buyers. The rebate is limited to not more than 10% of the home to be purchased. Therefore one has to buy a home equal to not less than $80,000 to get the max. Another restriction is on individual/family income. Above $150,000 of household income the tax credit is phased out.
These variables make it difficult to predict how significant the stimulus results are. We will not know the exact answer until the IRS reports on this. That is a next year event. For the sake of discussion, assume that this program is working as planned and that the number of homes sold as a result of the incentive is prorated equally over the life of the program. $3b divided by $8,000 comes to 375,000 homes. The program will expire at the end of November; therefore an estimate of the number of homes sold under the program from inception to date would be 250,000.
How significant is this in the home sales rebound that we seem to be witnessing? My answer is that it is a big factor. Housing sales are running at a rate close to 5mm per year. During the six months that the housing rebate program has been in place approximately 10% of the homes sold were a result of the program.
It is likely that the full benefits of the program were not felt until May 19th of this year. At that time HUD created the opportunity for a buyer to use the $8,000 as a down payment provided that the borrower obtained an FHA insured mortgage. FHA can insure up to 97.5% of a purchase price. This means that the equity of $8,000 could have been used to finance a 100% purchase. If one was wondering why there are the endless ads for FHA mortgages on cable TV, this is your answer. The cash that can be created along with the high LTV FHA loans makes it possible once again to buy a home with no money down. The three months that this 100% financing window has been open are the same three months where housing has turned around. That is not a coincidence. We’ve seen this before. It sells homes. It raises values. It looks good. But it creates a tremendous headache.
Given that the bulk of the stimulus was felt post 5/19 it is possible that as much as 20% of the sales over the last three months were tied to the rebate. Without that contribution we would not have seen any recovery in home values over the past three months.
These stimulus measures work. That has been proven. But these programs are not sustainable. The budget deficit is already too large. At some point the music has to stop with all of the economic intervention. When that happens the economy will have no boost. Economic activity will suffer. We have bought some time with all of the subsidies for consumption. That time is running out.
1%+ real economic growth for 2010 will be difficult to achieve unless Congress passes a second stimulus program. The question will be whether the money to fund these stimulus measures can be borrowed at a cost we can afford. The other question will be if the dollar can hold up in the face of America’s continued dependence on debt as the only driver of consumption.
The ability to expand the stimulus programs will be dependent on the will of the Markets as much as the will of the Administration/Congress. At the end of August there is no evidence of unfriendly markets. September and October are not likely to be as friendly.
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On Aug 27 09:06 AM The Geoffster wrote:
> I suspect Keynesianism has been played out. Credit has been extended
> to the breaking point as a result of the Greenspan housing bubble
> and public debt has exploded as a result of stimulus spending and
> QE. When will Bernanke's treasuries bubble burst and what happens
> then?
Encouraging purchases by individuals using tax dollars, effectively punishing those who are frugal and try to be debt free.
Sound familiar? Bailouts anyone? Mortgage rescue? Credit card defaulters being "forgiven" 75% of their debt?
The incentives for saving and not going into debt and being responsible are removed while bad behavior is rewarded.
We are giving alcoholic Uncle Joe a bumper of budweiser, a fifth of Old Crow, $2,000 in cash from savings, and the keys to the family van for a bender in Vegas. Yeah, that will have positive results for the family (*cough*).
Did you read the whole article or just the first sentence? He made the same points as you!
On Aug 27 11:34 AM MatrixSurfer wrote:
> Gosh, I just can't agree with the author, (nor those who believe
> he is brilliant) that these stimulus measures "work". The problem
> in the overall analysis is it uses a magnifying lens to view the
> effect of some new drug therapy all the while forgetting to step
> back and observe all the new problems caused. Heck, the cash for
> clunkers program should have come with a drug-ad type disclaimer;
> "may cause default, overextension, irrational exhuberance...." I
> believe 80% of the new cars purchased under the clunker program are
> foreign manufacturers; it certainly "worked" for them. As mentioned
> by a commenter elsewhere, it devasted the used car market not to
> mention robbing untold buyers of those used cars which most likely
> still had much remaining life. I may not be an economics wizard,
> but the logic of wasting resources with remaining life doesn't have
> any logical appeal to me in terms of economic growht. And lastly,
> the net effect of taking these cars off the road is equal to about
> one hour of emissions from driving so I've heard - typical washington
> solution; symbolism over substance. My bet is the housing (I almost
> typed "hosing") situation will be fraught with 'unintended consequences',
> not the least of which will be a whole new wave of defaults. All
> depends on how one defines "success", I suppose, and who is doing
> the defining. Cheers.
On Aug 27 11:50 AM Sluggo wrote:
> Matrix Surfer:
> Did you read the whole article or just the first sentence? He made
> the same points as you!
100% ?? Why does that sound familiar . . . nope . . . can't place it. Can't think of why this wouldn't work out either . . . nope.
Sigh . . . have we learned nothing? I ask.
Where's the proof? Just because we saw a surge of new auto buyers isn't proof of success. A sign of success is carry through into the overall economy in the months to come. Its far too soon to know this. If new car sales drop substantially in future months, it will be proof of a complete failure. Failure because taxpayers received no benefit and still have to pay the bill. I may side with a short-term plan to incentivize home purchases, but its only because of the depth of the turmoil in that market and its overall importance to the economy. But it must end in November.
And so the guns come out blazing. The Clearing House Association, another name for all the banks that were bailed out over the past year with the generous contributions from all of you, dear taxpayers, are now threatening with another instance of complete systemic collapse if Bloomberg's lawsuit is allowed to proceed unchallenged, let alone if any of the "Audit The Fed" measures are actually implemented.
As a reminder, The Clearing House Association consists of ABN Amro, Bank Of America, The Bank Of New York, Deutsche Bank, HSBC, JP Morgan Chase, US Bank and Wells Fargo.
In a declaration filed in the Bloomberg Case (08-CV-9595, Southern District of New York), the banks demonstrate no shame in attempting to perpetuate the status quo with regard to the Federal Reserve and demand that the wool over the eyes of the general population remain firmly planted in perpetuity.
The Clearing House submits this declaration because the Court's Order threatens to impair the ability of our members to access emergency funds through the New York Fed's Discount Window without suffering the severe competitive harm that public disclosure of their identity will cause.
Our members have accessed the New York Fed's Discount Window with the understanding that the Fed will not publicly disclose information about their borrowing, especially their identity. Industry experience, including very recent and searing experience, has shown that negative rumors about a bank's financial condition - even completely unfounded rumors - have caused competitive harm, including bank runs and failures.
Surely transparency would facilitate rumor-mongering to an unprecedented degree. After all rumors spread much easier when everyone knows the true financial condition of banks.
And here, in plain written Times New Roman, you see what racketeering by a major bank consortium looks like:
If the names of our member banks who borrow emergency funds are publicly disclosed, the likelihood that a borrowing bank's customers, counterparties and other market participants will draw a negative inference is great. Public speculation that a financial institution is experiencing liquidity shortfalls - which would be a natural inference from having tapped emergency funds - has caused bank customers to withdraw deposits, counterparties to make collateral calls and lenders to accelerate loan repayment or refuse to make new loans. When an institution's customers flee and its credit dries up the institution may suffer severe capital and liquidity strains leaving it in a weakened competitive position.
Pardon me if I am a broken record here, but would rumors not spread much less if there was more transparency, if investors and other financial intermediaries were fully aware of the conditions of their counterparties, if banks did not have to cover their billions in reserve losses by pretending they are viable and essentially being constant wards of the state?
The Banks' racketeering has gone on for far too long.
And yet, it does not stop: the conclusion from the banks' letter:
In sum, our experience differs from the factual conclusions the Court appears to have reached about the nature of competition in the banking industry:
* The competitive harm to institutions that are publicized as needing emergency funding is not "speculative," but demonstrated by the recent multiple failures of financial institutions whenever information about their funding difficulty has been disclosed.
* The disclosure does not involve mere "embarassing publicity" but information that could result in the immediate demise of an institution.
* The disclosure would not merely "stigmatize [ ]"the institution or make it "look [ ] weak," but goes to its very viability.
* The disclosure of accessing emergency funding is not an "inherent risk" of market participation, but an extraordinary risk in extraordinary circumstances.
* Competitors can use the disclosure to advertise or publicize that they are financial stronger because they don't need emergency funding.
In a nutshell - the banks want their complete opacity cake and eat it too, or else, the racket goes, the transparency that will somehow promote massive rumor mongering will again destroy capitalism. In the meantime, the Ken Lewises of the world can continue touting how stable their businesses are based on optimistic future projections, while implicitly, they continue to survive merely thanks to the cash granted them by your, taxpayers.
I sold a home last month and told the buyer to use the $8,000 as a down payment. The bank said no. FHA 3.5% down payment must come from the borrower or close family member.
Just sayin'
What AMK1100 said is not true either. This is truly a tax credit which does not need to be repaid.
The 3 years refers to the fact that you must own it as your primary residence for 3 years or else face giving it back to the IRS.
The original bill in congress had it as a back end loan but later changed it to a credit.
On Aug 27 03:55 PM AMK1100 wrote:
> The $8,000 tax credit really isn't a credit at all - It's a loan
> disguised as a credit. You get an $8,000 tax credit this year to
> be repaid within 3 years.
Thereby relieving the blockage that previously prohibited the replacement of this (recently sold) inventory. Seems like the intent was to benefit the manufacturers not the consumer. However, early reports appear that Foreign manufacturers are the major beneficiaries. Now some / most of the hapless consumers may have a monthly car payment. All to save a few $ at the pump, just what the consumer needs, more debt. (How about getting the polluting vehicles off the road to help keep clean the air we breathe?)
They, the Government might have further refined it to cars made / assembled here in the States, if one buys into this line of thinking in the first place. Now it appears that GE will be a prime beneficiary in a new, cash for refrigerators program. One wonders whether this is a reward for muzzling criticism of the Government's financial debacles on CNBC. At least Rick S. seems much more happy since he blew his cork and the land of Cramerica seems similarly enlightened.
However, here in Central Florida, anecdotally I am personally seeing more folks move out of the area, more businesses being listed for sale, that can not sell without seller financing, because the credit market is bottled necked, congested and funds are not making it to the mom / pop businesses.
Seems a continuation of the old Golden Rule adage, those who have (access to) the gold, rule.
When we do have the Public Health Insurance, which will be the step-child of Ted Kennedy’s 1973 HMO creation, will the recipients / participants in the Public Option be denied social vices such as cigarettes, alcohol, fast food, etc. After all if they are spending their discretionary income on these items, that money could / should go to paying for their own health insurance, not for items that will negatively affect their health.
Also confirming that the $8k credit is a credit, different from the $7.5k "loan" from the Government that was repaid at the rate of $500 per year. Those folks are still "stuck" with their repayments as the "change" was not retoractive, to my knowledge...