Wednesday, June 23, 2010

Home sales and stimulus games

After yesterday's report of an unexpectedly large drop in sales of existing homes in May, today's report for May new home sales added insult to injury. Without exaggeration, Naked Capitalism titled its report "Worst Home Sales Numbers Ever." New home sales dropped by a third from the month before. The expectations and critical judgement of many independent economic analysts have proven correct. The first-time home buyer tax credit stimulus program did not increase home sales but only pushed forward sales that would have occurred anyway but at substantial cost to the Treasury. Thus, the earlier jump in sales is now resulting in a sales crash. Naked Capitalism's charts tell the story.

The annual rate of sales (top chart) has dropped to the level of nearly thirty years ago. The bottom chart shows how much distortion government stimulus has created in the housing market. The simple reality is that there are too many houses available at too high prices, a direct result of the housing bubble (made obvious in the top chart). Government stimulus can only temporarily hide this fact and the market will suddenly and dramatically correct itself once the stimulus is removed.

Bottom line: the first-time home buyer programs have been a complete waste of tax money. Yet these new sales drops are prompting calls for trying it a third time! The only government stimulus that makes sense at this point are programs that create real jobs producing goods and services the economy actually needs. Building more houses, or giving tax breaks to people to buy houses they would have bought anyway, does none of these things.

No comments: