Courtesy, Calculated Risk

The month following the expiration of the federal government’s $8,000 home-purchase subsidy sees the biggest drop in new home sales in nearly 50 years?  I’m SHOCKED.

The tax credit merely pulled sales forward.  Was that worth the cost to the federal treasury?  I suppose it depends on what side of the sales contract you sit.  Because here’s a not-so-dirty secret: the tax credit didn’t serve as a purchaser’s subsidy – it subsidized the seller’s price.  In other words, sellers (including resale and the homebuilders) were able to hold the line on prices to the tune of $8K, while marketing the tax credit to potential buyers.  But what those buyers will soon realize is that they paid more than what the undistorted fair market value would have allowed them to.

This ain’t brain surgery, people.  The housing market won’t stabilize until inventory declines, bringing supply and demand into rough equilibrium.  That means prices must continue to fall organically.  And for that to occur, government-induced distortions have to go away.

So, consider the new home tax credit as a subsidy for construction jobs, as builders were given a lifeline to build homes that the market didn’t really need.  You could possibly craft a justification for the tax credit along employment lines, but it’s done bupkes for the housing market as a whole.  And so we limp along…