U.S. housing slump may require tax credit to encourage buyers

Posted May 6th 2008 10:10AM by Joseph Lazzaro
Filed under: Forecasts, Housing, Recession

In the private sector, as in public policy, sometimes blinders prevent one from seeing the entire landscape, and a good example of that may be the current status of the U.S. housing sector.

Banks, mortgage lenders, mortgage-backed securities holders and public officials have tended to focus on the plight on subprime and comparable mortgages, and rightfully so, as these loans constitute the largest pool of non-performing assets secured by homes.

U.S. housing: A psychological shift

Still, as economist Glen Langan points out, the unusual focus on subprime has caused the nation to overlook a broader trend regarding the housing sector -- namely, the psychology of the housing market.

"What we're not grasping yet, as a nation, is that even with programs to help people stay in their homes and avoid foreclosure, the public's stance toward the housing market has changed," Langan said. "The psychology of the housing market has changed. And this has little to do with at-risk mortgages. This a psychological shift among middle-income and upper-middle-income homeowners and taxpayers. It looks like they'll be sitting on the fence for a long period of time, and this will delay the housing recovery, hurting the economy in the process."

What's at the root of the psychological shift? Langan said factors that clearly indicate that tougher economic times are here and up ahead (higher oil prices, food prices, job lay-offs and little or no U.S. economic growth) combined with high home inventory levels -- about a 9.5- to 10-month supply at current sales rates -- telegraph to Americans that, unless you live in an oil boom town, median home prices are not going to recover any time soon, "not this year, and probably not in 2009."

"Now, in a market with these kind of characteristics, why would a young couple or a single, first-time purchaser buy a home?" Langan said. "You wouldn't. You'd wait, of course, and that's the psychological shift, the expectation that buying now is foolish because prices aren't likely to rise, that'll delay the recovery in housing."

Further, Langan underscored that Americans' changed attitude toward housing cuts across society -- it's not simply a view held by 'first-time buyers' or 'young couples starting a family.' Also, in that the mortgage assistance programs lower foreclosures, they do help the sector, he said, but they don't eliminate (or reverse) the psychology of the current housing market.

Even more significant, Langan said what the nation may find is that in the quarters ahead foreclosure rates may decline, on-time mortgage payments increase, but home sales still don't rise ... and median home prices continue to fall.

More pump-priming?

A sobering projection, to be sure. But is life in housing's state of nature, to paraphrase Hobbes, all nasty and brutish? Not quite.

Langan said there is an antidote, but there may not yet be enough political support to pass the policy: a home buyer tax credit.

Langan argued that, ultimately, the U.S. Congress may have to authorize a temporary tax credit for home buyers to encourage more activity -- more home buying by fence sitters to stop the upward trend in inventories, and by extension, stop the downward trend in prices.

The home buyer tax credit could match a percentage of a home buyer's down payment, up to a maximum: for example, a $3,000 annual tax credit for five years in moderate-price regions, up to a $10,000 annual tax credit for five years for the high-cost home areas of New York, San Francisco, Boston, Los Angeles, etc.

Nevertheless, some may counter that the market should be left to itself, that the nation should let the housing sector recover naturally, when the fence sitters start buying. "That may sentence the U.S. to a very long economic slump," Langan said. "There are going to be a lot of fence sitters in this market."

- -

What's your take on the housing sector? Do you think homes prices will recover in your region of the United States by early 2009? Or are prices likely to remain the same or fall more? Let us know how things are where you live.

Tags: featured, food prices, foreclosures, housing, housing sector, inflation, inventories, jobs, median home prices, oil prices, U.S. Congress, U.S. economy

Print this

Reader Comments (Page 1 of 1)

5-06-2008 @ 11:21AM

VLB said...

Why would people only buy a house for its increase in value? We own a home and will never sell it and when we are gone, our son intends to never sell it and will teach his son the same.
People used to buy homes to live in and not as an investment. This is as it should be.

5-06-2008 @ 11:31AM

Will said...

That's all well and good, but prices are this high because people saw homes as an investment. Just like oil, food, and metals prices are so high because of investment and speculation that prices of those goods will continue to increase.

So the current slump in prices has a lot to do with the draw down of consumers' expectations that they're going to make money on their homes, no matter how long they live there or what kind of mortgage they have.

5-06-2008 @ 11:53AM

# said...

I appreciate your view of the bigger picture, but I see yet another problem I don't hear mentioned anywhere. In the old days, "starter homes" were smaller, simpler, and more affordable for the first-time buyer, but builders make more money and local government gets higher tax revenue from sales of high-end houses, so now the market is full of high-end housing that is not affordable for most potential buyers. The problem was masked by creative financing that got people into these houses they couldn't keep. If financers and buyers now act realistically and do what is affordable, these high-end houses will be slow to sell, and since these are most of the houses out there now, housing sales in general will be slowed even further. Prices can be cut, but the high-end housing with the granite counter tops, top grade appliances, etc. are so expensive that even if the price is cut in HALF, I STILL couldn't afford it. I don't see the housing market improving until developers and communities wise up and build houses which are truly affordable for the average family, and I don't see that happening for a long time.

5-06-2008 @ 3:52PM

fesource said...

VLB Are you kidding. Is your last name WALTON or ENGLES. Your Home is your most valuable asset for Family and wealth. You dont have to sell but good lord if it doesnt appreciate there are bigg problems. Your going to be living in a falling down home and your neighborhood will turn into a Ghetto.

5-06-2008 @ 6:00PM

william lindblad said...

The primary reason for owning a house is to put a roof over your head. In my lifetime ALL and EVERY home in the U.S. has incurred a price increase. As long as these increases are in line with wages and general economic conditions there will never be a problem. A home is an investment, but it is more like a 401K - something that produces over a period of time and not in the next few years. The housing market is NOT a stock market. When a bubble bursts on Wall St. the losses are mostly on future looking paper and unless massive, will not bring down the economy. The up and downs of the street have been around for years and they do not normally result in massive layoffs and escalating prices. On the other hand sub-prime has set in motion a domino effect that will bore into all aspects of the economy and last for years.
As far as the government offering tax incentives? First they have to find the money to bail out Fannie and Freddie and than, explain this action to the taxpayer.

5-08-2008 @ 7:37AM

Mike said...

People are fence sitting because homes are still unaffordable on a historical comparison of median salary / median home price ratio. It is astounding that those in the laisse faire financial community think it is a good idea for the government to come prop up home prices. This will only delay the recovery. Let the market correct and the fence sitters will take action when the affordability story improves.