The mainstream media is always clever in tying market moves to some “breaking news”. Of course, they need you to think this because if the market moves aren’t closely tied to news events or “breaking news” as certain business news stations like to describe every announcement they have, you wouldn’t have any incentive to watch. Yesterday’s downdraft in stocks was attributed to the home buyers tax credit not getting an extension. Of course, the move in stocks was mainly due to the rise in the dollar and the collapse in oil prices (which subsequently resulted in weakness in materials and energy which make up 25% of the S&P 500). But don’t let the MSM tell you that….
The news, while described negatively, is not negative at all (if it’s in fact true – Goldman is betting that it’s not). This program is almost as wasteful as the cash for clunkers program. Please allow me to dumb down the program for you: the average home sells for about $180,000 in the United States. So, what the government is basically doing is this – they are going to borrow money from the Chinese in order to incentivize new home buyers to borrow money from the banks in order to get the equivalent of a 4.44% discount on their new home. Over the course of a 30 year mortgage, that is practically nothing. That makes the plan sound pretty stupid, right? Well, that’s exactly what it is (aside from being a cheap attempt at price fixing a collapsing market).
It gets worse though. The Center for American Progress did a study showing that 4 out of 5 buyers would have purchased a new home regardless of the tax break. The NAR itself supports this claim. They say that just 150,000 of the 1.8MM new home purchases were due to the tax credit. In other words, the government is wasting tens of billions of dollars to persuade buyers who would have purchased a home regardless of the program.
Even with this wasteful stimulus that the NAR claims is absolutely vital, home prices are just 3% off their bottom according to Case Shiller. So, in the middle of the strongest season for home buying this program that has been touted as being “highly successful” is actually just providing a short-term bust to a long-term problem. As we have often described here at TPC, the problems in housing are secular in nature and cannot be fixed with some short-term government stimulus. This is simply a weak attempt to price fix a collapsing market.
We saw the same exact occurrence with the “cash for clunkers” program. Consumers didn’t need to purchase new cars. They need to deleverage, yet the government is incentivizing reckless behavior just so they can prop up their debt based bank run system. What happened to auto sales after the program ended? They collapsed because that is what the real underlying market represents in terms of supply and demand. Housing will do the same. As it should.
The government needs to accept the fact that they have made critical errors over the last 20 years that caused all of these bubbles. You can’t “print” your way out of a bubble as we clearly learned in the 2002 downturn. The only way to create sustainable economic growth is by promoting good business practices, ethical lending, fiscal prudence and innovation (not financial product innovation!). We aren’t going to create a short-term fix for a long-term problem. For now, it’s time to start focusing on the massive debt problems on the private levels while also ensuring that we don’t continue to make the same mistakes that got us here in the first place. So far, we are showing little to no signs of any of that. Getting rid of the homebuyers tax credit is a good start, however.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.