Extension likely on homebuyer tax credit

With powerful lobbying groups behind the push to extend the homebuyer tax credit, dissenters likely will have little sway as the expanded version of the measure makes its way through Congress.

The New York Times reports that a final decision by the Senate is likely today, and that the House is expected to also accept it this week.

But the $8,000 tax credit, which would be extended until April 30 to more than just first-time homebuyers this time around, isn't getting much praise from Jack Hough with SmartMoney:

The National Association of Realtors has called such an extension "essential." The Mortgage Bankers Association agrees. The National Association of Home Builders says, "Failure to act now could derail the fragile housing recovery even before it has time to take root."

I respectfully disagree for perhaps a dozen reasons. Let me offer five.

Much of Hough's reasoning circles back to subjects I've written about, so I can't really argue with the guy. I also can't disagree that the extension offers exciting opportunities for places such as Las Vegas, where homes have lost more than half their value since its 2006 peak. But still ...

• Subsidies raise prices, and house prices are already too high.

Just last week I blogged about a report in The Wall Street Journal, where I found Hough's piece, about how the government's push to boost the real-estate market has artificially inflated home prices by about 5%, basically creating a false bottom to the market that eventually could lead to another dip in home prices.

So, you argue, at least we're boosting homeownership in the meantime, right? Maybe not. That same week, bloggers Simon Johnson and James Kwak pointed out in The Washington Post that, obviously, higher prices are hardly the right way to boost homeownership. (Journal excerpts key points here.)

And The Journal's tips for people who want to take advantage of the program follow that line of reasoning, recommending that people buy in neighborhoods where the $8,000 benefit will actually make a dent in the purchase price. Just because you're allowed to spend as much as $800,000 on a house and still participate in the program doesn't mean you should.

• The house subsidy has little value as economic stimulus.

Hough's explanation needs no comments from the peanut gallery:

Food stamps create $1.73 in economic activity for every $1 we spend, reckons Moody's Economy.com. ... (T)he money they spend at food markets leads grocers to spend with suppliers, and suppliers to spend with farmers, and so on. A dollar spent on unemployment benefits creates an estimated $1.63 in economic activity and one spent on infrastructure, $1.59. The result of these things? Bellies are filled, the jobless are given a lift and roads and power grids are upgraded (and, of course, a bit is wasted along the way). ...

A dollar spent on the housing credit creates an estimated 90 cents of economic activity. That's not a multiplier effect. It's a divisor effect. 

• The benefits of stimulus spending are unproven.

Well, that's depressing. I guess that just goes to show that we really don't know what's in store. Is the recession over? Has the housing market hit bottom? Turns out nobody knows.

• America has no money.

So far, the tax credit is expected to cost us $10 billion, according to The New York Times article. The extension would add $11 billion more to what we, the taxpayers, are paying so that new homeowners can buy new furniture.

And Hough points out in his calculations that the tax credits together would cost the average household $170 -- right now. But since the program is being funded by borrowed money, the cost of the program could end up costing four times as much. America has no money? With that reasoning, I have no money!

• We already spend plenty on housing stimulus.

It's called a mortgage interest deduction, and Hough says it will cost taxpayers about $100 billion this year. And if that's not enough for you, remember that the Federal Reserve is buying up mortgage securities to help keep interest rates down. Who knows, maybe we'll end up benefiting from that if all the borrowers end up paying up, but it's still costing us money that we simply don't have.