Saturday, September 4, 2010

Did the homebuyer tax credit cause false buyer demand?

Image ID 1052434 by Stock Exchange user nazreth

There are some talking heads claiming that the federal $8,000 first-time home buyer tax credit caused a lot of fake demand for houses earlier this year and the sharp drop in July home sales was because the tax credit ended.

It's important to distinquish the difference between false demand and pushed-forward demand. The tax credit probably did convince some buyers to buy sooner than they would have otherwise. But to imagine that it created buyers out of thin air is pretty silly.

I’m no economist. I’m not even real smart sometimes. But lemme think on this for a minute.

Those talking heads believe there’s people out there who went out and spent a quarter of a million dollars, or a half a million dollars to buy a house this Spring, that they didn’t want, just so they could get an $8,000 write-off on their 2010 taxes when they file them next Spring? 

Spending $125,000 to get $8,000? Sure, right.

Wife: “Honey! I just saved $8,000 by buying us a new house! And it was only $199,900!”

Husband: “Whaaaa?  We can’t afford a house. We just decided we weren’t going to buy a house yet.”

Wife: “But, honeeeee.. . . It was on sale. I saved us $8,000!”

Sure. OK talking heads. People spent $125,000 to get $8,000. Whatevs. You believe that, I’ve got some oceanfront property in Arizona. It’s on sale!