'First-Time Homebuyer' Credit May Cost Government up to $96,000 Per Home

According to the National Association of Realtors (NAR), about 1.8 million people have taken advantage of the first-time homebuyer credit. They claim that the credit has increased sales in the stricken industry by 350,000 homes. The National Association of Home Builders (NAHB) agrees with the 1.8 million figure but calculates that the credit has increased total home sales by only 150,000. In determining who to believe, as to the difference in numbers, historically, I’ve always found the NAHB to be a more reliable source of statistical data. Just a few years ago, in 2005, the NAR’s chief economist was declaring that the housing boom would never end. NAR has little credibility left.

Both trade organizations are associations of persons whose businesses greatly benefit from such government largess. Both support the existing credit, and want to expand it. The first-time homebuyer credit phases out for a couple making more than $150,000 or a single person making more than $75,000. But, those who "qualify" can get $8,000 in “free” money from the government, if they buy a house, so long as they have not owned a home for a minimum of 3 years. The idea is to stimulate the sale of homes, and the economy, in the midst of the biggest collapse of home prices in history.

The program is another "Bailout for Billionaires". It is designed primarily to help banks increase the value of collateralized debt obligations on their books, by artificially increasing the price of homes, using artificial demand created by government money. Secondarily, it is designed to help realtors and home builders. Let us remember that innocent first-time home buyers are ordinary people, like you and me, and they are getting up to $8,000 for buying a home, which is very nice. These folks tend to be young, so their jobs are even more at risk than most others, in this bad economy. Like the rest of us, assuming they don't lose their jobs, many will be slapped with heavily increased tax rates, in the near future, to pay for it all. So, even if those who quickly agree that free money shouldn't be given to banks, realtors and home builders (all of whom the public loves to hate), many will take serious offense at opposition to giving charity to such nice folks as first time home buyers.

Some economists, in the Ben Bernanke School of Thought, support programs like "Cash for Clunkers" "First Time Homebuyer tax credits" etc. Others think such programs are a terrible waste of money. Given that I tend to agree with those who disagree with Bernanke, I'd like to examine the thinking of the Bernanke types carefully. Why not give away free money? Doesn't it stimulate the economy? So, shouldn't we expand the program so that it covers all home buyers? But, then, aren't we all going to get screwed by this depression, in the end? After all, it is not just homebuyers who are suffering. Why not give money away to everyone? Let's give an $8,000 credit to each American who breathes!!

But, "economists", like Bernanke, tell us that the health of our economy is now closely connected with the health of foreign economies. How, then, can we act in such a selfish manner. We certainly cannot be acting wisely by limiting this largess solely to U.S. citizens? We must to do more! Non-citizens may not pay taxes, but what does that got to do with anything? The current giveaway doesn't require tax paying experience. Let's just give away $8,000 to every single human being on the planet! No! Better, yet... let's add an additional $8,000 for each one of their cats and dogs?!

If we do all this, it'll help an lot of nice people, and put plenty of cash in everyone's pocket. According to the Bernanke theory of economic development, giving away this money means we will end up with a terrific economy. It sounds crazy for only one reason. It is crazy. The problem is that money has value ONLY when it is rare and hard to get. If printed ad infinitum and handed out so liberally, it reverts to the value of the paper on which it is printed. So, this slight exaggeration serves to illustrate the utter bankruptcy of these ideas, and the fact that we are on a course for disaster, not economic recovery.

There are only three ways money can be obtained by the government. First, under a fiat paper system, the Fed can conjure it up out of thin air. If we continue conjuring, however, the dollar becomes worthless, and we face hyperinflation and economic collapse as surely as Zimbabwe once did. So, the printing presses must stop.

The second method is borrowing. Barack Obama, like his predecessor, George W. Bush, is borrowing money like crazy. The latest estimate of the likely budget deficit this year is going to be $2 trillion. That is the biggest government deficit in the history of mankind. Eventually, you've got to pay it back. Taxpayers will need to pay for the interest, and return of principle. So, borrowing is a case of paying for today, with the money that belongs to our children and children's children.

The final alternative is to raise taxes now. That means taxpayers would pay for the giveaways, immediately. Of course, if the most staunch supporters of these programs were forced to pay for them, there would be a hue and cry of angry voices, reaching to heaven itself, and the nonsense would come to a screeching halt. For this reason, the beneficiaries must keep the issue of eventually "paying the piper" off the agenda.

America is borrowing, printing, and spending -- waiting for tomorrow to pay for it all. If the proponents of the programs play their cards right, their children and grandchild will pay, not them. But, sorry folks. By now, you must be thinking about what an unpleasant fellow I am. Reality is a medicine no one wants to take, right now. Wall Street is in the mood to party.

Marginal cost/benefit analysis involves determining how much money needs to be spent to achieve each extra unit of production. Ostensibly, the public purpose of cash giveaways, like "First time homebuyer" is not simply to steal $8,000 from one taxpayer and give it to another. If such programs were presented as what they are, they would not pass Congress, and, if they did, they would be quickly invalidated by the Courts as unconstitutional seizures in violation of the 4th Amendment to the Constitution.

So, instead, all "Bailouts for Billionaires" programs are paraded around as if they are measures designed to support "economic activity, growth and recovery", not ones which aim to forcibly transfer wealth from one section of the population to another. This is as true of "First-time homebuyer credit" as it was of TARP, TALF, and every other 4 letter word that has passed through Washington in the last year. It is a simple fact, however, that more houses are not built, nor more people employed, nor commissions earned, simply because the government gives 1.8 million people $8,000 each. Extra homes must be sold, in order to achieve the alleged economic "stimulus" factor, and the only homes that count are those that are above and beyond the number that would have been sold anyway.

Even according to NAR, a maximum of 350,000 additional homes were sold because of the credit. Both organizations say that a total of 1.8 million homes have been sold where the buyers qualify for the credit. So, the calculation is 1.8 million x $8,000 for a total cost of $14.4 billion, so far, for the entire program. If the NAR is correct, we must divide by 350,000, to get to the cost of each home sold. The calculation results in a conclusion that our government has bought each extra house for $41,142.86 per home. If NAHB is correct, and they have the better record of accuracy in these things, we divide by 150,000 extra houses. That means that the government is buying each extra home for $96,000.

The $96,000 does not represent the amount of government largess given out to each new home buyer. That remains at $8,000 per person. As should be clear from the title of this article, I am not talking about the cost per person, but, rather, the cost per house. That is the important factor that must be considered when evaluating the effectiveness of any stimulus program. This is known as "marginal cost". It means the cost of stimulating extra sales in a particular industry.

Let's be clear on this. Charity to first-time home buyers was not the reason given for this program. Allegedly, its purpose is to stimulate economic activity. As a charity or welfare program for home buyers as well as the industries that sell homes or benefit from their sale, the program works well. However, no proof is required that recipients are in desperate personal need, under threat of starvation, or living in unsafe conditions. Indeed, many of the industry barons who benefit from the payments live in huge mansions, and have multiple homes, and hundreds of millions worth of assets. Accordingly, such a welfare program would be an unconstitutional seizure of property. With respect to its stated purpose, however, which is to stimulate business activity, it is a dismal failure, and costs far more than the limited benefits it brings. With deficit spending expected to come close to an unprecedented $2 trillion dollars this year, it doesn’t take a rocket scientist to realize that we cannot afford this.

In order to get a robust economy out of the current economic wreckage, we must dispense with endless crony capitalist bailouts, of which the home buyer credit is merely one example. Robust economies stimulate all industries, including real estate and banking. What Bush, Bernanke and Obama have created is NOT a robust economy, but, rather, an unsustainable façade designed to create favorable looking economic numbers, but, only at the cost of long term growth. We are heavily borrowing from the future, to an extent never before attempted in world history, in order to pay for today, and accomplishing nothing.

Paying up to $96,000 (almost half the median home price) to get the economy to produce one more home is idiocy. All of the "Bailouts for Billionaires" programs, including, but not limited to "First Time Homebuyer Tax Credit" are desperate attempts to falsify short term macroeconomic growth. Because they will solve no problems and, instead, make things worse in the long term, their only purpose is to delay the inevitable falling out, allowing connected individuals and firms to reposition their portfolios for either an inflationary depression or hyperinflation, depending on what the "powers that be" are really planning for us.

We need to be smarter than we are, and we need to stop being taken in by the people who lobby for programs like this. We also need to look past the false economic statistical numbers that such programs create in the short term. Wasteful spending programs that save zombie banks, subsidize car makers, realtors, home builders and appliance makers (the new "rebates for refrigerators" program), are all economically irrational, and harmful to the nation in the longer run.

The economy is like a dam that was originally built of concrete and steel, and which has lasted over 220 years. It developed some holes, which were badly leaking, but, instead of plugging the holes with concrete, we are plugging them with clay. Special interest groups, including big banks, car makers, and now the housing and appliance industries, have been stealing the concrete, and using it to repair their vacation homes.

All signs are that the dam is about to be swept away by a big flood. These signs are being ignored. Citizens, living in the city below, are not being evacuated. Instead of using concrete to repair the dam, policy-makers talk nonsense about so-called "green shoots", and support this nonsense with false economic numbers created by wasteful government spending programs like "Cash for Clunkers", "First Time Homebuyer Credits", and "Rebates for Refrigerators". Because policy makers refuse to do the necessary repair work properly, for fear of offending their friends who have stolen the concrete, the dam is going to break.

Disclosure: No positions in any home builder, real estate firm, REIT or bank.

Comments

[SW Richmond:]

"Were I to make a list of our dangerous radicals I should name, first, the Congress of the United States which treats with contempt the plain mandates of the Constitution."
- Massachusetts Congressman George Tinkham, 5 April, 1923

Sep 20 05:50 PM

[deee:]

Why do you say the government? Like it is not coming out of my pocket or my kids pockets or all my friends pockets. They talk like the government is some rich person with trillions of dollars and not associated with the people at all. This is one sick country. If you don't see it isn't there. That is why so many people put up fences because if they don't see the crummy yard next door it doesn't exist.

Sep 20 06:34 PM

[CanadianInv...:]

Excellent article!

Unfortunately most people (taxpayers/voters) are incapable of such rational thinking having been deluded by their governments for too long. If only more people would learn some basic economics we would not be in this mess.

Sep 20 07:36 PM

[notsosmart:]

the stadiums are crowded with beer swillers who could not care less about the above article.as long as they have the app.$200 it costs for a day to watch the grown men knock each other down & collect millions for doing it, they dont care about tomorrow.the owner of the new stadium in dallas said it should be like roman coliseum.anybody know how the romans ended up?LOL

Sep 20 08:50 PM

[nova:]

Avery Goodman wrote:
"All signs are that the dam is about to be swept away by a big flood. These signs are being ignored. Citizens, living in the city below, are not being evacuated. Instead of using concrete to repair the dam, policy-makers talk nonsense about so-called "green shoots", and support this nonsense with false economic numbers created by wasteful government spending programs like "Cash for Clunkers", "First Time Homebuyer Credits", and "Rebates for Refrigerators".

Because policy makers refuse to do the necessary repair work properly, for fear of offending their friends who have stolen the concrete, the dam is going to break."

This is a very good and accurate comparison.

PS
We have crossed a threshold when US can ever pay back its debts. The "dam" is beyond a repair. It is just a matter of time before a catastrophe happens.

Sep 20 10:09 PM

[TheSnail:]

This type of useless ranting is why this website needs to add the ability to block certain contributors.

Sep 20 10:34 PM

[Paul168:]

This commentors false premises and at best, fuzzy math are both absurd and reckless.Pick a number, any number, and stick with it. You can't pick a number from column A and then use a number from column B just to make a point and then pick a number from column C to make an even more outlandish point.And we are talking Tax Credits,( not giveaways) some of which aren't fully used and there are no bank balance sheets that are being inflated.And finally, if there were more houses sold under the program than there would have been sold without the program, in this economy, would that not be a good thing? Considering all of the people involved in the selling and settlement of the houses being paid and not to mention the state taxes and fees collected?

Sep 21 12:03 AM

[Philman:]

Where did you learn math, Paul168? The math here is not fuzzy. It is perfectly in accord with the principles of arithmetic. You, apparently, cannot add, multiply or divide. I wonder how bad you are at algebra?

The real question posed by this article is the efficient vs. inefficient spending of money by the government. Obviously, the people's taxes, past, present and future, should not be spend in the interest of helping particular lobbies, like that of banks, real estate brokers, and home builders. The People's money ought not to find its way, preferentially, into their greedy pockets, and out of the pockets of the rest of us, just because they have managed to hoodwink or control our politicians.

This nation has a crumbling infrastructure - roads, bridges, tunnels, etc., that all need to be fixed. The education system is very poor quality compared to other countries also. We should be spending our money on things like that, if on anything, to help everyone, not just the selfish interests of narrow minded people like you, Paul, and others who I strongly suspect work in either the banking, brokerage, or home building industries.

Why didn't the realtors and home builders save up money for bad times, while they were making money hand over fist, during the boom? Why didn't the banks do the same? They didn't, because the economically incompetent people in those industries didn't think about tomorrow, only about today, and, now, with their lobbyists hard at work, in Washington, stealing money from the rest of us, they are going to transfer the suffering that comes from such incompetence away from themselves, and onto the rest of us.

Let those who deserve to go bankrupt, go bankrupt, and be done with it! That is the best way to recover, according to Jim Rogers. These bad debts need to be written off, not as a result of the bankruptcy of the United States of America, as a nation, 3 years from now, but by the bankruptcy of all the incompetents who caused this Crisis, and the banks, brokerage houses, real estate firms, and home builders that they work for. Don't steal from good people and give the money to bad people. That is what this article is really all about!

Sep 21 12:42 AM

[Admir:]

Where did You Learn Math?
Independently of the number of houses SOLD, our Tax money is going individually per buyer, therefore, per house. There's no need to divide by the price, and there's no impact on the final PRICE. Could be $150,000-$300,000 or $1,000,000. Still $8,000 per Unit. And the only "Paul168" understood.
There goes the Aura of Legitimacy of the Press...

Sep 21 12:53 AM

[Thad F:]

This program is helping to set a bottom in the real estate market. As a builder and real estate agent I can tell you it is working in Idaho. If we don't set a bottom in home sales more banks will go under and credit will never be freed up. I don't like spending my tax dollars on any of the stimulus programs but the alternative was unthinkable,(another depression). I can think of much better ways to have doled out the money here such as a shared equity with the government in which we could have recaptured some of the 8,000 dollars at the sale of the houses in the future. Likewise in the cash for clunkers I'm sure we could have spread the money wider and more efficiently with a wider sliding scale and less money overall per transaction but I still see an overall net gain by saving our economy if by no other means than a slight of hand which convinced the public that disaster has been diverted. The evidence for this is in the huge bull market on a total lack of fundamentals. I think the average P/E ratio of the S&P 500 is over 100 and the consumer economy is stalled but yet peoples hopes are up and the economy may follow which will lead to more taxable income which may someday bring us back to the economy we had before the Bush tax cuts.

Sep 21 01:16 AM

[bluesky123:]

As Marc Faber says, if you try to prop up an economy with consumption based giveaways "you eat the cake and at the end of the day you have nothing". Better to invest in permanent job generation, not fleeting consumption based programs.

This is how to make America a world beating powerhouse again: 1) More corporate R&D - you need to invent to create new technologies/companies...
2) More seed capital for start ups (seed capital basically does not exist in America - ask any struggling start up company CEO)
3) more SBA lending
4) more engineers graduating in the US
5) more visas for smart foreigners who want to take risks and START companies which will employ lots of people and expand the tax base
6) more building of the knowledge economy in which we have an advantage
7) more manufacturing in highly specialized engineering niches with high value add - which is what powers Germany's exports
8) more thinking about how to invest in the people and companies who "make the stuff the world wants and needs".

That's how to grow America. Not throwing money from helicopters for bankrupt consumers to gorge on even more consumption.

Sep 21 04:54 AM

[SW Richmond:]

I gotta tell you, I am sick of hearing this crap. Defeatist sentiments do no one any good at all. Why bother expressing them? Do you want the rest of us to give up, too? Why not just crawl back under your desk, take what you get and like it? Leave the rest of us to continue deluding ourselves that we might actually be able to re-create an economic system based on truth and human liberty.

On Sep 20 08:50 PM notsosmart wrote:

> the stadiums are crowded with beer swillers who could not care less
> about the above article.as long as they have the app.$200 it costs
> for a day to watch the grown men knock each other down & collect
> millions for doing it, they dont care about tomorrow.the owner of
> the new stadium in dallas said it should be like roman coliseum.anybody
> know how the romans ended up?LOL

Sep 21 10:28 AM

[einstein p ...:]

LEN was heavily invested in building homes in the FL market, which is no where near a bottom, no matter what the pundits say.

The economy in Miami was based on the real estate business and tourism --- two industries which will not recover soon. The trickle down effect has caused hotels, car & boat dealers, restaurants, shops, and every other industry to tank as well. As a result, businesses are being boarded up, foreclosures are accelerating, and people are leaving the state.

Today LEN announced bad earnings, which was not a surprise. The statement that the company would "return to profitability" in 2010 is a bit hard to fathom, considering the circumstances.

Sep 21 10:39 AM

[Deehena:]

I agree with the conclusion but why did it take 20 paragraphs to say so?

Sep 21 09:23 PM

[logicforlib...:]

I agree with the article. Where in the Constitution of the United States does it say the Federal Government will spend taxpayers dollars wrecklessly and borrow money endlessly to play economic foolery. The original purpose of the Federal Government was to protect the States and Nation - period. The Federal Government has self perpetuated itself way beyond the original design. Is it time for the People to take it back into control by limited its self giving duties or is it too late - has the original call for Liberty been lost?

Sep 22 12:52 PM

[Paul168:]

The reason I said it was fuzzy math is because the tax credit is 10% of the selling price for those who make up to $76,000 single $150,000 married. That means VERY FEW of the homeowners requesting the credit qualify for the ENTIRE credit.Of course if all of these new homeowners are buying $800,000 dollar houses then I stand corrected.Over-inflating the amount the government is going to spend on this program to prove on over-inflated point, in my opinion, is fuzzy math.


On Sep 21 12:42 AM Philman wrote:

> Where did you learn math, Paul168? The math here is not fuzzy. It
> is perfectly in accord with the principles of arithmetic. You, apparently,
> cannot add, multiply or divide. I wonder how bad you are at algebra?
>
>
> The real question posed by this article is the efficient vs. inefficient
> spending of money by the government. Obviously, the people's taxes,
> past, present and future, should not be spend in the interest of
> helping particular lobbies, like that of banks, real estate brokers,
> and home builders. The People's money ought not to find its way,
> preferentially, into their greedy pockets, and out of the pockets
> of the rest of us, just because they have managed to hoodwink or
> control our politicians.
>
> This nation has a crumbling infrastructure - roads, bridges, tunnels,
> etc., that all need to be fixed. The education system is very poor
> quality compared to other countries also. We should be spending our
> money on things like that, if on anything, to help everyone, not
> just the selfish interests of narrow minded people like you, Paul,
> and others who I strongly suspect work in either the banking, brokerage,
> or home building industries.
>
> Why didn't the realtors and home builders save up money for bad times,
> while they were making money hand over fist, during the boom? Why
> didn't the banks do the same? They didn't, because the economically
> incompetent people in those industries didn't think about tomorrow,
> only about today, and, now, with their lobbyists hard at work, in
> Washington, stealing money from the rest of us, they are going to
> transfer the suffering that comes from such incompetence away from
> themselves, and onto the rest of us.
>
> Let those who deserve to go bankrupt, go bankrupt, and be done with
> it! That is the best way to recover, according to Jim Rogers. These
> bad debts need to be written off, not as a result of the bankruptcy
> of the United States of America, as a nation, 3 years from now, but
> by the bankruptcy of all the incompetents who caused this Crisis,
> and the banks, brokerage houses, real estate firms, and home builders
> that they work for. Don't steal from good people and give the money
> to bad people. That is what this article is really all about!

Sep 28 01:37 AM

[Paul168:]

After following my own fuzzy math....I screwed up. My bad.... my apologies.

Sep 28 01:43 AM

[Paul168:]

I'll try this one more time. The reason that a lot of new homeowners won't receive the entire credit is because of the narrow restrictions on income.75-96 thousand single and 150-190 thousand married.Meaning that a lot of them won't qualify for the complete credit. That tells me that the final numbers or the worst case scenario can not and will not apply.

Sep 28 01:59 AM