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.