Is the First Time HomeBuyer Credit a Failure?

Originally Published in Nevada Examiner on September 17, 2010

The July sales of existing homes fell by a devastating 30%. What could be more frustrating is the fact that there seems to be no light at the end of the tunnel. For the past many months players in the real estate market are just curious to know if we already hit rock bottom. Many feel that we have not and a lot of us just keep on scratching our heads where the market is actually heading. Experts predict that the next six months could be worse before they get better. They say that values of homes will still decline by double digit in some areas in the U.S. especially those hardly hit, tops Vegas, within the next 6 months to a year. No. No….Johnny, it’s not the end of the world!


Many observers noted that this phenomenon might be traceable to the imminent expiration of the $8,000 First Time Homebuyer Credit, (FTHBC). Guys and gals, it’s gonna be gone by Sept 30! The question we are putting forward here is, “was there a real additional demand created with the advent of the FTHBC or was this another failed policy by the Obama administration? “

The fact is, many critics are taking the position, and I may have to agree with them, that the FTHBC was just another political gimmick that may have only influenced or hastened the timing of home purchases and simply put, provided free money to many people who were already mind-set to buy their houses anyway. Sad to say, the FTHBC did nothing to change the fundamentals (guys, remember your Economics 101) of demand and supply in the housing market. While others may argue, “yeah it did,’ “particularly the supply side since new homes were aggressively built during this period.” Yeah, you may have a point too. But what I am saying here is, there was no increase in the demand since I am arguing here that only the timing was influenced. The “artificial” increase in demand was unsustainable to really make a difference in the market forces- because if it did then the market should feel upswings in the price of homes. But it did not.

If one will objectively analyze the empirical data, the FTHBC was probably an armament to postpone the day of reckoning in the real estate market while simultaneously creating an illusion that the economy is on its way to recovery. Whether as a solo policy or in concert with other Federal programs, nothing much was achieved as we continue to witness home prices decline-- hitting more than 30-50% of their peak values. The game of refinancing is over! We now realize that housing isn’t just going to be another driver to improve consumer spending.

We also note that the Loan Modification programs, as being announced in the radio, is also a failure! They say that more than 50% of those who did loan modification are kicked out of the program no more than 6 months after modification. They’re back on the red and swiftly become delinquent again with their mortgage payments.

However, the lobbyists which include Realtors, Mortgage Bankers, and Home Builders continue to propagate the concept that rising home prices is an indicator of a robust economy. They are encouraging the government to do everything in its power do stand by this school of thought. Corollary to this blinded paradigm, and in keeping with this scenario, the government is trying its best to keep homeowners in their houses they just couldn’t afford! People just want too much house for too little money!

Sound economics would suggest that the above concept of rising house prices could only be a symptom or a manifestation but cannot be a cause of an aggressive or robust economy. Whether you are a Classical, Keynesian, post-Keynesian, Reaganite or whatever school of thought you belong to, you will agree that productivity in the economy is the true measure of economic growth. If we translate this to the needs of today’s economy, that would mean we need jobs, more jobs and more, more jobs!

In fact, from my readings, I recollect that in order for us to fulfill the growth rates set by government of 3.3% in 2010, we need to create 1.5 million jobs. For 2011, government has set a target of 3.7% which should translate to 3.1 million jobs. Lastly, the target growth rate of 3.8% in 2012 would call for the creation of 2.6 million jobs.

Mr. President, we desperately need jobs. Reports say that there are some areas, in the country, particularly Las Vegas NV, which are saddled with more than 14% unemployment rate. Some urgent measures have to be taken- probably not just bailouts-- before it’s too late…