Home Sweet Home?
According to the St. Louis Post-Dispatch, home prices in the St. Louis region rose 20.4 percent in the last three months — much higher than the nationwide increase of 7.9 percent. From the article (link added):
The quick growth, according to real estate data firm Clear Capital, was driven largely by sales that involved the $8,000 tax credit for first-time homebuyers. Many of the places where sale prices grew most are less-expensive Midwestern markets where $8,000 has a bigger impact.
This stimulus is artificial, and it will end as soon as the state and federal governments stop propping up housing prices with programs like this one.
Owning a home is suitable for those who can afford the investment commitment and associated risks. Nudging people into homes that they can’t afford has overwhelmingly negative consequences and could prolong the housing crisis or provoke another one.
Because this tax credit keeps housing prices artificially high, it defeats its ostensible intended purpose of nudging people into owning homes. As I have discussed previously, the rate of homeownership tends to remain constant over time in Saint Louis and elsewhere, despite the government’s nudging. Although this tax credit gives an individual the ability to make a larger down payment on a house, he or she will incur tens of thousands of dollars in additional debt by purchasing a house that is overpriced.
Furthermore, this tax credit program largely shifts transactions from the future to the present, instead of inciting new transactions to occur. Many of these beneficiaries would have purchased a home independent of the tax credit. This program is similar to sales tax holidays and last year’s cash for clunkers program in this regard.
Given that encouraging homeownership is such bad policy, why does government extend and introduce new programs? In an article in The Atlantic, Megan McArdle provides an answer (link via Audrey Spalding):
[P]oliticians want to help poor people with capital formation, and homeownership is the way that the American middle class has traditionally gone about capital formation.
Too bad that real estate is not a good investment!