The National Association of Realtors' index for pending sales of previously owned homes plunged 16% to 96.0 in November from an upwardly revised 114.3 in October, the industry group said Tuesday.The Realtors are expecting pending home sales to increase as a result of the government's recent extension of its homebuyer tax credit program. But, "it will be at least early spring before we see notable gains in sales activity," NAR Chief Economist Lawrence Yun said.
This decline in pending sales of previously owned homes is a real-world example of Mankiw's fourth principle: "People respond to incentives." Prior to November there was a "surge" of pending sales that was "caused by buyers racing to close deals ahead of the initial expiration of a government tax-credit program." The impending expiration of the tax-credit induced consumers to purchase homes before the deadline because the marginal cost of a home would have been the same regardless of the tax-credit while the marginal benefit of purchasing a home before the deadline (the home and the tax-credit) was greater than that of a purchase after the deadline (the home without the tax-credit).
My response is based on principles three and four of Mankiw's ten principles of economics.
As professor McKinney said in class today, when you add incentives it can squew the market because it artificailly changes the cost of goods. While rising home sales are good for the microeconomy, what about the macroeconomy? Can the government afford to give tax credits away with the current budjet problems?
ReplyDeleteAlthough the tax credits are spurred from a government program that is detrimental on the national debt, the overall effect on the macro economic scale is promising Caleb. A tax credit is one of the most effective forms of government spending in my view as it still laves a power of choice with the taxpayer. The taxpayer can benifit in many ways all of his choosing with the reduced marginal cost. It also stays marginally true to traditional market values. So this program is much more efficient than its, pure spending counterparts.
ReplyDeleteIn the context of the housing market however, it is an even better sign, it first of hints at a resumed flow of monetary assets within the economy, banks are lending. This is also seen in the auto markets as reported by msnbc at:
http://www.msnbc.msn.com/id/34701594/ns/business-autos/
With the economy begining to shows signs of life because of this, and if the government can help with that by reducing taxes Im all for it.
How does the tax credit leave the taxpayers with a power of choice??? The credit is equal to 10% of the home's value no greater than $8,000 for a first-time home buyer, and it's a refundable credit so if a person owes the IRS less than their credit is worth they get a refund check of the difference.
ReplyDeleteNow, let's suppose a buyer gets a 30-year fixed rate FHA loan from the HUD, which has the lowest minimum down payment that a buyer can make (3%). Suppose the house is worth $100,000 and that the buyer pays $500 for the deposit, $3000 for the down payment, and $1000 for closing costs. That's $4,500 spent. Let's say the interest rate is 4.7% (which is pretty low). The monthly payment on this mortgage would be $503.08.
So here's the math:
$8000 tax credit
-$4500 deposit/down payment/closing costs
=$3500
I'll round down to $500 on the mortgage. At $500 a month the buyer would break even in 7 months.
7 months, and that isn't including the monthly payments for insurance, utilities, and property taxes.
If the buyer bought the house today, didn't have to pay ANY income taxes--which is impossible--and was refunded all $8,000 of the tax credit, he/she would have already spent $6500 (without insurance/utilities/property taxes) that he/she wouldn't have had to spend if he/she hadn't bought the house, and ALL of that $8,000 would be spent on the mortgage in a little over a year.
How does it give buyers a choice? In theory $8,000 of credit on a buyers' income tax will increase the buyer's spending power, but in this case the tax credit will, at the very most, cover a few months of payments.
I agree with Rich, but in this economy why wouldn't you get the cash the government is giving. It is intended to give you the power to choose through helping with the starting cost of owning a house. Everyone knows normally $8000 will not buy you a house, except now in the kalamazoo area which you can buy a foreclosed house for that much or a little more. But, the 8 grand can go to paving your way into a house which you can choose to live in because you can actually afford it with a fixed rate mortgage.
ReplyDelete