Homebuilders Looking for Handouts
Apparently the real estate industry is pushing for a $7500 homebuyers’ tax credit. This is, as Andrew Jakabovics points out, a pretty dumb idea. Meanwhile, I just saw on TV a representative from the homebuilders’ lobby looking for his own share of the stimulus pie. Again, dumb idea.
What you’re looking to do with stimulus is employ idle resources on creating something that will be of use to someone. But the whole reason real estate prices have been plummeting has nothing to do with an absence of tax cuts, and everything to do with the fact that we’ve built too many buildings. There are only so many people in the United States and thus there are only so many dwellings that can be occupied. The collapse of the construction industry is creating a lot of unemployment and so it’s desirable, insofar as possible, to focus stimulus on areas likely to employ idle building trades workers. But there’s no sense building more homes or doing anything designed to resuscitate the construction boom.
It’s all sort of too bad since as an urbanist—and as a guy who lives in a neighborhood full of brand-new construction and vacant lots—there are plenty of construction projects I’d like to see undertaken. But realistically, it’s just hard to see much new construction being viable for several years even if we’re optimistic about the general state of the economy.
25 Responses to “Homebuilders Looking for Handouts”
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January 7th, 2009 at 5:12 pm
We have too much housing in the US? Tell that to all the homeless out there!!!
The real problem is that we have too much OVERPRICED housing. Typical of a new media duechebag like Lord Yglesias to come at this problem from the viewpoint of the sellers and not the buyers and frame the situation according to that viewpoint. Its the same sort of framing that lead to trickle down economics.
A true progressive would be looking for ways to get those needing housing into the unoccupied houses and underutilized buildings, then look for ways to construct even more housing because the US population is growing.
January 7th, 2009 at 5:13 pm
I might also suggest that there were too many houses built in the years leading up to the crash, indeed an excess stock might well have triggered the inevitable bubble burst. I can’t quite prove it, but the data I’ve seen seems to suggest that Real Estate developers in OC, Las Vegas, Tampa etc… had the notion that everybody in the country wanted to live in one of their tacky McMansions. Turned out to not be the case and when several neighborhoods started seeing an uptick in vacancies, prices declined a bit. Pop!
January 7th, 2009 at 5:30 pm
I’d like to modestly propose an improvement on the RE industry’s proposal: if the problem is too many houses and not enough people, clearly the solution is more houses per person. So the tax credit should be for second, third, and fourth houses; the more houses you own, the bigger your credit.
This would also help struggling former Important Wall Street People to maintain the kind of lifestyle to which they’re entitled.
January 7th, 2009 at 5:47 pm
Matt,
Agree that the goal of economic policy is that we want to use idle resources to build things people wants. The only tool to spark this is to stimulate demand, which comes from four places: consumption, capital investment, government, and exports. If these people are smart, they are not arguing that this tax credit will keep people employed building houses: we need a recession because people pounding nails in Las Vegas need to find something else to do. Rather, the relators should be arguing that this credit will inspire some upward pressure on housing prices which will improve the balance sheet positions of americans who are feeling serious wealth effects as their house and retirement funds are worth less and less. This might get them to spend more (or save less, as their savings are, at this point, sitting in ultra-safe, unproductive treasuries).
Now, I agree this is a pretty dumb proposal: the better way to put upward pressure on housing prices is to ensure that people being foreclosed on can stay in their homes, rather than requiring that people switch homes to get a benefit. So yes, stupid stimulus plan, but for different reasons. I don’t think a 7.5k tax credit will create too many new houses. But it would be nice if we did something that targeted people who risk losing their homes without also helping those in the market for a ski home. It’s not a precise tool, a homebuyer’s tax break.
January 7th, 2009 at 5:47 pm
If new construction is out, what about retrofitting existing stock to be more energy efficient / earthquake, hurricane, flood resistant / less lead paint-peeling.
January 7th, 2009 at 5:54 pm
Part of the problem of the real estate market is the huge glut of housing where people don’t want to live. In DC, break the power of the ANCs and put in nine and ten story buildings near metro stations. Take the unemployed construction workers and give them shovels to dig more subway tunnels.
January 7th, 2009 at 6:11 pm
I’m thinking along the same lines as Mobius,
We wnat to put the building trades people back to work and get somethign usefull out of it, retrofitting existing buildings with more effiecient energy and so is the way to go.
January 7th, 2009 at 7:24 pm
A $7500 tax credit for *new* home buyers already passed last summer.
H.R. 3221 was the vehicle. From what I can tell*, not a single Democrat in either the House or Senate voted against the bill at any stage of the process
*(I could have missed a name in the half-dozen votes)
January 7th, 2009 at 7:30 pm
Not to pick nits here, but Jakabovics’ post that Matt links to doesn’t link to any documentation of the building industry’s lobbying for an expansion of this tax credit program (despite there being ten links in Jakabovics’ post, he just asserts that they are). And, it s/b noted, this is an existing program, and what Jakabovic is writing about is some unspecified (due to his not linking to anything) expansion of it, not, as Matt implies, a new program.
But the real thrust of my comment is that, while this program is likely not the best use of money for stimulus (or even a good one), there is a definite simulative part to it. And it actually could add a great deal of stimulus, depending on how the money is used (versus Jakabovics’ derisive comment of “the equivalent of a latte a month”). The “latte a month” line is based on the buyer using the $7500 as part of a down payment. Unlike those who would use the credit as part of their down payment (follow the link in his post) buyer could choose to not add that to a down payment and instead uses it for moving expenses, new appliances, furniture, solar panels, whatever it is directly spent, i.e., immediate stimulus.
In fact, I am such a buyer, and I plan on flat-out spending the vast majority of my “credit” (more of a zero-interest loan, really). The tax credit in no way influenced my decision to buy (good bargain, great interest rate, etc.). My house is a perfect candidate for solar panels, but since I will have minimal equity in my new home (I am putting minimal down payment) I won’t be able to get a home equity loan any time soon (not in the still down-trending market), so even with tax incentives for solar I could not afford solar panels. So in addition to my maybe buying an actual sofa and dining set, this program will help get one more roof in Sacramento outfitted with solar.
Anyway, back to the point: if this program is meant to encourage people who otherwise wouldn’t be buying to buy, and if people are using the cash simply to add to their down payment, then this does suck simply as stimulus. But if people instead simply spend the damn money, it is (duh).
January 7th, 2009 at 9:28 pm
I would be for a handout if instead of homes they built concentration camps for African Americans.
For their own protection, a modern plantation.
January 7th, 2009 at 9:59 pm
Actually, James, it may be that if you talked to your lender you could get the loan increased to pay for the installation of solar panels. A fellow out here got his loan increased to pay for solar panels because a) the house is then worth more, and b) with less of his income going for electrical utility bills he had more available for loan payments.
It’s not uncommon to get part of the loan for work done to bring the property up to lending standards.
January 7th, 2009 at 10:26 pm
Which reminds me of a great moment is stupidity. Real estate, particularly commercial real estate had quite a crash in 88 89 coincident with the S&L crisis. (Lessons never learned) That said, government tax policy did have a causal effect on the crisis. In 86 a huge swath of stupid tax write offs were eliminated, including ones allowing dentists to take 10 to 1 write offs on losses from cattle raising and oil drilling and also assorted tax plumbs for real estate partnerships.
Congress convened to explore the real estate problem and who better to step into the breech than The Donald. Eliminate all taxes on real estate profits he proposed. Not of course out of self interest but for the good of the nation. For the good of the world!
January 8th, 2009 at 1:07 am
Stimulating house destruction would be better for the economy. Instead of buying toxic securities, buy up foreclosed housing and destroy it. It would soak up the glut, and might be a lot cheaper than the stuff we’re doing.
January 8th, 2009 at 1:14 am
Ah, a slave to some defunct economist here. To say that the cause (or even a cause) of the current financial crisis is too many homes is like claiming that the root cause of the dot-com crash was too many computers.
There are only so many people in the United States and thus there are only so many dwellings that can be occupied.
No, no, no, no, no, no. This is dangerously close to general glut theory and all such attendant nonsense.
Our housing stock has not outstripped our population; in fact, many people who recently owned their homes now do not, and many people who would still like to find they now cannot. The price rigidity of housing has, however, resulted in an impaired ability to sell off existing homes (consider how hard, even now, it is to purchase a short-sale home), and risk assumptions that led to recent production rates have proven overly optimistic, meaning that builders and sellers bought or built at prices and numbers higher than proved reasonable, in expectation of a profit that proved lower than desired — particularly a problem when those expectations formed the basis of extended credit.
This is emphatically not the same thing as saying that we have more houses than people. We simply have more houses than people willing to pay current prices.
More generally, we do not have a glut in production; we have a dearth in risk tolerance, which has dramatically collapsed global capital stocks. This may have originated in part within the housing sector, but the shock deleveraging by the financial industry has meant in part a drive-down in market prices for illiquid (risky, frequently durable) assets (including homes and CRE) and a consequent tightening of credit across the board.
Right now we’re in a vicious circle: the flight to cash and drive-down in collateral asset prices has tightened credit, so that would-be debtors are fighting for a smaller pool of capital. That in turn pushes the risk curve to the left, meaning that investors can get a higher absolute yield for less risk than previously, which in effect pushes riskier credit seekers out of the pool. When the credit seekers are companies seeking (for example) bridge or mezzanine financing, this means that many companies that had available credit several months ago are now unable to obtain it, leading to contraction or failure. This makes risky loans even riskier, which leads to the bottom falling out of the commercial paper market, as seen in A2/P2 spreads. Companies fail, contract or just stagnate; unemployment rises, wages fall, production shrinks, and the economy chokes.
Now, having said that, it’s true that any increase in housing demand will come primarily out of existing stock rather than new home starts (because price rigidities keep the current market from clearing, which leaves a lot of housing “on the shelf,” as it were). There are probably better methods of exerting upward pressure on housing demand, but I’d want to see some numbers run to convince me it’s a good use of taxpayer monies. Intuitively, I think that such actions don’t satisfy the Keynesian multiplier, and thus have a less stimulative effect on the economy than, say, stuffing cash in hidden bottles for enterprising children to discover.
January 8th, 2009 at 2:16 am
We built to many of the wrong houses in the wrong places. The oversimplification here is naive.
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