Economist: Let’s Cut New Home Buyers a Deal

A short-term tax break for middle-class home buyers is what the housing market needs now, says the director of UCLA’s Anderson Center for Forecasting.

Edward Leamer believes there should be a 5 percent tax rebate worth up to $25,000 for first time buyers, writing in The New York Times.

"Based on what I’m seeing, a stimulus should commence in the second half of this year and be offered for about 12 months, depending on how the housing market is responding,” Leamer says.

That’s because the problem with the economy right now is not really consumer spending, Leamer contends, but a huge backlog of homes for sale.

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Waiting for market forces alone to correct the imbalance would be a mistake, he argues. There is now a 9.6 month backlog of homes for sale, and in places like Detroit that figure has stretched to nearly 19 months.

Nevertheless many first-time buyers remain completely priced out of buying. The latest S&P/Case-Shiller index of home prices in the top 20 metro areas puts homes at almost 81 percent more expensive than in 2000.

Home prices historically appreciate at 1 percent annually.

"Many argue that we don’t need government intervention to bring the buyers back; we just need the market to work its magic through lower prices,” Leamer says.

"Well, not entirely. When it comes to housing, lower prices don’t inevitably cause sales to rise. Why? Because lower housing prices create the expectation of still lower prices later, causing buyers to wait for a better deal.”

A weak market then overshoots, leading to too little new construction, exactly the same way a hot market leads to too much building.

The Fed is to blame for the current fix, since it cut rates even as the housing market heated up between 2002 and 2004, Leamer says.

"Now it doesn’t matter what the rates are; not even low levels can entice buyers when house prices are declining,” Leamer says.

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