Calculated Risk has been pointing out that the housing tax credit encourages renters to buy a house, which pushes rents down. This causes the CPI to appear lower.
In a post last week, CR wonders if this will lead to a deflationary psychology in which consumers delay purchases waiting for lower prices. I believe this will not happen and that the primary risk is inflation. The housing issue results in one part of the economy getting cheaper due to excess supply. It does not mean other things will get cheaper. The risk, IMHO, is that lower rent prices will mask inflation in the rest of the economy caused by loose monetary policy.
Although I don't see it causing deflation, the credit doesn't do much good. It just moves the problem around. The problem is banks and individuals entered loan agreements that would only work if houses prices rose. The only way to make houses expensive is to limit building them and to destroy some housing units. (Other ways are immigration and getting people who live together to form separate households.) All of this is crazy. The government should stay out of this for two reasons: a) it’s wrong to bail out failed business deals and b) it won’t work. If they succeed it making houses expensive suppliers find some way to come in and produce more, making the excess supply problem worse.
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As I see it, what they've done is raised the opportunity cost of not buying a house for those who were looking to purchase anyways. I think you'll get a cash-for-clunkers effect where new home buyers will stay out of the market at the beginning of next year...assuming the program doesn't continue. This will lead to more deflation in housing prices once supply bumps back up down the road.
ReplyDeleteThere is one major issue that economists tend to ignore when they talk about the housing market and that is that psychology has changed. All products are based on the "utility" that individuals derive from the product. Prior to the collapse, utility was high because people were opperating on the false premise that housing prices cannot fall. Working in the mortgage industry previously, I can attest to this. Companies actually believed that it was not in any way likely for housing prices to fall.
Today, that mentality has changed and will not come back. Investors will not be throwing caution to the wind n the future and buyers will not be likely to use "creative financing" either. The overall market will be cooled for years to come. It's poor reasoning to believe that you can in some way reverse this psychology via tax credits.
C Gen via anonymous
@C Gen
ReplyDeleteThat's a terse no-nonsense explanation for the entire situation.
the same mentality will come back in my belief, but it is generational. its happened before and it'll happen again and again. people are always looking for quick profits. and each generation thinks it is smarter than the generation before them.
ReplyDeletebut, that only my poor opinion.