http://www.msnbc.msn.com/id/37867779/ns/business-real_estate
Sales of new homes collapsed in May, sinking 33 percent to the lowest level on record as potential buyers stopped shopping for homes once they could no longer receive government tax credits.
The bleak report from the Commerce Department on Wednesday is the latest sign of a precarious housing market that is struggling to recover and could weaken the broader economic recovery. It follows a disappointing report issued earlier in the week showing sales of previously occupied homes had dipped in May.
And what caused this sudden and dramatic dip in home sales? Why, the Federal tax credits expired, and people aren't getting paid $8,000 of taxpayer money to buy a new home.
Analysts linked the sudden drop in new-home sales to the expiration of federal tax credits of up to $8,000. But double-digit unemployment and slow job growth have also weighed on the market, even with mortgage rates at near-historic lows.
"We fear that the appetite to buy a home has disappeared alongside the tax credit," Paul Dales, U.S. economist with Capital Economics," wrote in a note to clients. "After all, unemployment remains high, job security is low and credit conditions are tight."
What happened with home sales is the same thing we saw happen with cash for clunkers. People who would be in the market for a car sometime in the near future took advantage of the government money to buy then... thus the program created few car sales, instead displacing those from the near future to become immediate sales. Once the program ended, car sales dropped flat for a few months.
And the same thing is liable to happen here. The drop in new home sales was so extreme because of the same effect. The incentives inspired people to buy homes who otherwise would have bought them in May or June. The government paid up to $8,000 in tax credits, thus artificially inflating home sales figures in April, for example. So the market is in for a period of flat sales.
Government subsidies or tax credits don't create economic activity, and they don't give a real boost to the economy. As we can see, the April high is balanced by the May low. All they really do is waste money and ratchet up the national debt.
I think your cash-for-clunkers analogy is absolutely correct.
ReplyDeleteIf the government came out today with a ice cream-for-all program...half price on ice cream for 30 days...then you'd snatch up as much ice cream for your freezer as possible (even if your wife got all upset about taking her space in the freezer). The ice cream industry would make tons of money for 30 days, then...there'd be a long dry period (maybe even six months) before you any more ice cream. The ice cream industry would dry up and several small brands would likely dissolve by that point.
When the government steps in...it creates a ripple across the economy which will eventually reverse-ripple back. In this case...the housing market will be negative for at least six months as folks are satisfied...then, purchases will start back up (it's our natural tendency).
If you were going to sell a house during the second half of 2010...well....it probably won't happen. Somewhere around spring of 2011...it will take off again.
It wouldn't surprise if five or six industries are working on the administration for a cash-for-whatever program...because it's free and would take out the lesser-prepared businesses (destroy competition) and help their larger sized operations. Heck, there might even be a cash-for-clunker lawn mower deal brewing out there.