Death of Tax Credit Signals Return to Market Functionality

The new homebuyer tax credit expires at the end of next month.  Officials are considering extending the credit into next year to avoid destabilizing the housing markets.  The news today suggests that recent gains in residential real estate may be temporary.  I think they should pull the plug on the subsidy and let the market function without intervention. According to Goldman, what good has come from the credit is only temporary.  They expect a five to ten percent decrease in prices when the credit expires.  The administration also admits a possible decline in prices.  The decision of whether to extend the credit depends on how much government intervention has aided recent stability.

Most people buying new homes would be buying now anyway.  The tax credit amounts to a transfer payment, with no real value added to the market.  At this point, the credit is either inflating prices or putting off an inevitable adjustment. Better to take the five percent hit now and let the market function as intended.

The Washington Post argues that the credit has artificially inflated prices and hurt commercial real-estate markets by transferring cash to homebuyers.  It also argues, and I agree, that the credit exposes commercial real-estate to unfair competition.  When the credit expires, both markets will be equally attractive.  Low prices and low interest rates are enough to attract buyers in competitive markets.  We don’t need the artificial stimulus.

Thomas J. Powell