Home purchase credit – questionable idea at best

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Sen Dodd proposes extension of the $8,000 tax credit for first time home buyers.  The idea is to stabilize the home market, but why?

According to an ad by the National Association of Home Builders and the Nat’l Association of Realtors such an extension will:  create 350,000 new jobs, inject $28 billion into the economy and generate $12 billion in additional tax revenue.  No doubt it will also find a cure for obesity as well.

Housing prices are still too high, why do we want to prop them up? Historically a house costs about three times average income, you do the math. Today even after the decline in home values over the last year or so, the average price of a home in many parts of the country is far more than three times average income. My home has dropped in value in the last year, at one point it was worth nearly $700,000 today it is closer to $550,000 or so.  Did I lose money, that depends on your point of view, I paid $59,000 for the house in 1975. 

Wouldn’t it be more logical to allow prices to decline so that a home is more affordable to more people and not just some first time home buyers?  Where is the logic in giving people money to buy something for an inflated price as opposed to a strategy that lowers that inflated price?  Didn’t we get into this recession mess in part because we made it too easy to buy a home, no down payment, “creative mortgages” stretching our budget because the price of the home was so high?  The idea that we need to artificially prop up home prices to sustain the home equity built up in these homes is also questionable.  Clearly that is a long term goal for homeowners, but in the short term it is an often misused asset as many Americans have recently learned.

Stimulating home buying in the short term for a select group of Americans may seem like a good idea today, but at what price?  Do we want to add to the deficit, keep home prices over inflated and create a false sense of entitlement to those who want buy a home?

Would a long term strategy to assure that all Americans who can truly afford a house are able to obtain one at a realistic price and with a traditional long term and fixed payment mortgage?



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