Thursday, January 7, 2010

New details emerge for the California tax credit..

Jon Lansner over at the OC Register points out the new tax credit will be for First Time Home Buyers only. Does this change the math much on the wastefulness of this program?

First off, Does the market need stimulating? We must have massive supply of homes just sitting on the market needing to be sold.. Right? Well looking at the facts shows otherwise. From the latest CAR report here is California's months supply of inventory. Remember 6 months is considered a balanced market. Anything under 6 months is a sellers market.

4 months! This is not a market that needs stimulating. There is a tremendous amount of supply not on the market because the government is keeping it off the market. Until that supply reaches the market the market will be supply constrained and not in need of stimulating. It is completely the wrong time for the stimulus.

Now lets see how wasteful the stimulus is, here is the percentage of first time home buyers from last year:

The real question is how many new first time home buyers would buy with the stimulus. We can roughly estimate that by the national tax credit. From the NAR press release:
NAR estimates that about 1.8 to 2.0 million first-time buyers will take advantage of the $8,000 tax credit this year, with approximately 350,000 additional sales that would not have taken place without the credit.

So about 18% of sales were stimulated, some will argue they were just pulled forward instead of new sales created but we will leave that aside. That means each additional new sale costs taxpayers $54,340! Awfully expensive way of "stimulating" sales. The CBIA estimates that $16,000 is taken in for every new home sale purchased and that 3 new jobs are created per home. We can see that the number of new homes that will be purchased during the time frame will be about 3,000 but the number of new homes that wouldn't have been purchased anyways is only about 550. We can also see that the stimulus is a money loser not a money maker like the CBIA suggests :
Snow noted that because building a new home generates some $16,000 in state tax revenues alone, a new tax credit would more than pay for itself.

If anyone has trouble with the way I have come up with the numbers please email on the right hand side, I'm a bit rushed this morning and don't have time to lay it all out in the post. The numbers all come from industry sources and are contained in todays and yesterdays post on this topic.

The really important points to remember is that the market doesn't need stimulating and that the tax credit is an extremely expensive way of stimulating sales.


Rob Dawg said...

One word on the inventory mess: DeBeers.

Anonymous said...

Job stimulus works by creating more jobs. Jobs are created by creating demand, to ramp up inventory. Increased demand = increased production = more work. Someone moving into a new home, even if it's a resale in theory will still generate more demand for everything from real estate agents, lending servicers, landscape products, furnishings, appliances, etc. This "tax credit" would be the most efficient means of getting money into the economy using existing infrastructer in place (CA tax board) and not creating some new means of distributing money into the economy. It also makes sure the money is used to generate demand since the credit only comes if you buy a home. This is much more efficient than giving businesses or banks a money because it they have shown that they will hold on to the money....not spend it. It is also much more quick than the "Shovel Ready" money the feds gave out....most of that money has yet to be spent. why? Because there exists no efficient way to distribute has to go through all of the federal and state red tape first. Can you think of a more efficient way to generate demand than this? This boils down to the age old question: What comes first, the Chicken or the Egg? Does demand make the economy grow or do we sit by and wait for the economy to grow on its own and thus and generate demand?

Effective Demand said...


It only works if new demand is created not if it just goes to pay off existing demand. The size of the market is so huge relative to the tax credit that it literally a drop of water on a hot plate.. instantly boiled away in a flash of steam. It is extremely ineffecient and wasteful and will not do the job it is designed to do, stimulate home sales.

There are ways of stimulating demand that are much more effecient than this and that would use existing infrastructure. There is also the open question whether sales need to be stimulated. You see the graphic from the C.A.R. that months supply is only 4 months (historically low). My local board the SRAR has been been complaining in their press releases that sales are so low because of lack of supply... not lack of demand. So why try to stimulate demand?

It is just a bad idea. California has a budget crisis, $200 million can be used much more effeciently somewhere else. If housing demand ever drops again they can revist the issue. But right now there isn't a demand issue, it is all about the supply side that the government choked off. If you want to stimulate sales, get more homes on the market in the price ranges people can afford them.

Anonymous said...

Anon, in a free and open market supply always raises or decreases with demand. Are you suggesting that this is not a free and open market? If supply is the issue (not enough) it makes no economic sense for builders to not build more homes to generate cashflow....instead they are laying off to control their margins! Also, you suggest that there are more efficient ways to generate demand but don't name any, please do. As far as affordability, homes are at a historical low and affordability is at a historic high. The issue is market perception and home purchases\month are still at historic lows. The issue is market perception, nobody wants to buy a home just to see what has happend to existing homeowner over the last two years happen to them....depreciation of value and loss of equity. So, now we have all of this pent up demand and need some way to start the ball rolling. $200 mil might be a drop in the bucket but the idea is to start momentem moving and it is just one piece of the puzzle. You can't take a narrow focus and look at one initative, look at the whole at the State and Federal leverl. You get a bunch of different initiatives going and bit by bit they hopefully can get some momentum and turn market sentiment. More spending on healthcare, social welfare, prisons, and school all are good things and are all needed. However, these things will not jumpstart the market. In the long run, a strong & healthy market will make us all better off.

Effective Demand said...

I definitely dont think this is a free an open market. How could anyone?

1) The Fed applying 1.75 trillion dollars to lower interest rates for mortgages (between treasury purchases, fannie/freddie short term debt purchases, and MBS purchases).

2) Tax credits designed to stimulate demand.

3) Enormous restrictions on supply through HAMP and foreclosure moratoriums

You call THIS a free and open market? Hardly, it is one of the most engineered markets (certainly THE biggest by dollar volume) in the world designed to keep prices high.

As far as "market perception of nobody wanting to buy a home". I simply have to say you have no idea about the market. I am out shopping for homes almost every weekend (since late 2005!). I went in 7 homes this weekend. I meet buyers all the time. I talk to agents all the time. I live and breathe the market, there are plenty of buyers out there, the issue is what they can afford versus what they can buy are askew. So the few affordable on the market get snapped up with multiple offers and the high end sits. There is massive demand in California, it is a renter rich state with a ready supply of buyers.

Again, DEMAND ISNT THE ISSUE. Market supply is a very low FOUR MONTHS supply. DEMAND does not need to be stimulated.

As for not offering alternatives, I actually did it was just in the previous post and I wasn't trying to make a long post even longer. There are many housing finance agencies like CalHFA that could use the money to make more loans. That would ensure the money is used to stimulate demand for people who needed down payment assistance. That would stimulate new demand instead of rewarding people who already bought already.

But until more supply gets on market you would only be making the market worse not better. Sales are clearly grinding to a halt, they could be taking off but they government doesnt want any supply on the market.

Ask yourself, if people cant afford a home with 3.5% down and sub 5% mortgages just how exactly are they going to afford one?

Anonymous said...

Demand is the issue, I'm sorry but it is. Look at units sold/month vs units sold historically. Demand is the issue. Don't confuse the point regarding a free and open market. the point I am making, is that if demand were really there. Banks would be putting foreclosures on the market like crazy and builders would be building. Neither is happening because there isn't enough demand. You quote a 4-month supply. This may be true, but there is still not enough demand to allow sellers to raise prices to a normalized level. CalFHA has income restrictions, that will not reach a broad market like the tax incentive can. Why should just low income buyers be helped when the intent is to help a broader market. And...although this is only for first time buyers, it is actually helping the move up buyer too. The move up buyer is more able to sell his home and move up. There aer a lot of positives to this plan and again I believe it is the most logical and most efficient way to stimulate the broader market. This is not only helping home sellers. Your theory of the government not wanting supply on the market makes no sense. Are you suggesting that the government has had secret back room meetings with builders and asked them to stop construction?

The mortgage moratoriums are probably more political than econimic forces at work. You have to remember that our representatives are politicans first. If they sat idle while millions lost their homes to foreclosures and at the same time gave the banks foreclosing trillions in tax payer bailout there would be riots in the streets and our representatives would not be re-elected. This is a political move not an economic move. The tax incentives are more economic and less political.

Effective Demand said...

This will be a two parter due to character limits on the blog.

"there is still not enough demand to allow sellers to raise prices to a normalized level. "

Huh? By most measures prices are above historic norms. Price to income, Price to rent, Case/Shiller, etc. Only monthly payment to income is within historic thresholds and is certainly not "low" and that is caused by the massive the QE.

That fact is what is causing sales to be slow. The demand for homes is tremendous, if anything the housing bubble proved is that demand for homes in California is only limited by the banks willingness to lend unlimited funds. Now that the banks have come up with the bright idea of wanting to be paid back the loans buyers can get are much smaller but that doesn't remove the demand.

Prices should be falling not rising. Normalized levels are somewhere south of where they are now. With interest rates set to rise .50-.75% by Spring sales will drop more or prices will.

It is the juxtaposition of this market. Demand is high, Effective Demand (sounds familiar!) is low. That is to say since buyers are now constrained by the banks to debt to income (DTI) ratios that are historically high, relative to the bubble years the DTI are very low. So there is this huge swath of demand but it can't afford much on the market. The tax credit isn't going to change that. There is only two ways to solve that issue, higher incomes or lower prices. It isn't anymore complicated than that.

"if demand were really there. Banks would be putting foreclosures on the market like crazy and builders would be building. Neither is happening because there isn't enough demand. "

Well banks can't get their hands on the homes to put them on the market. The asset managers know what is happening in the market but they are not the ones making the foreclosure decisions, the government is. The banks clearly want foreclosures at a higher level then they are now. Builders in California have a different issue, the land they own is in the wrong spot (far away from population centers). Shifting strategies means getting land in the right spots at the right price, getting it entitled and then starting building, there is a huge lead time to that.

"Your theory of the government not wanting supply on the market makes no sense. Are you suggesting that the government has had secret back room meetings with builders and asked them to stop construction?"

Err, The government has openly said it doesn't want the foreclosure supply on market. Builders have nothing to do with the issue. This isn't some weird conspiracy theory, it isn't something open to interpetation, this is a reporting of the facts as stated by people from the Federal Reserve and Congress.

"CalFHA has income restrictions"

Something that can be changed in an instant if its truely an issue.. but people with lots of money don't need to be encouraged to buy a home

Effective Demand said...

"that will not reach a broad market like the tax incentive can"

Hardly reaching a broad market..

The tax incentive will apply to 20,000 homes (200 million divided by 10,000 dollar). The CAR prediction for home sales for 2010 is 527,000 or 43,916 homes a month average. First time homebuyers are 47% of the market. So the tax incentive would go to slightly less than one months worth of first time home buyers (43,916 * .47 = 20,640). If I wanted to get the tax credit it would be extremely difficult to time a purchase and get. Escrows are lasting anywhere between 30-60 days if it's a relatively clean sale.. You have a 30 day window in which to close and (MAYBE!) get the credit. One lost piece of paperwork, one appraisal coming in low and needing reording, one thing wrong and you don't get the credit. If everything goes right you still aren't assured to get the credit since the money is limited and it is first come first served. There is a very long lag in the home purchase process, making the tax credit a crap shoot for purchasers.

Using industry data I have shown how many homes would be purchased and of those how many would be "stimulated" demand instead of existing demand. $54,000 per additional sale is extremely expensive. The State could literally create more jobs by buying $200 million of new homes and then burning them to the ground. That plan would be MORE EFFECIENT than the one currently on the table, that is how bad this plan is.

Again, this tax credit does barely anything to generate new demand but insteads rewards demand that is already purchasing a home. It is extremely ineffecient and wasteful. For a State with such tremendous budget issues the money would be much better spent somewhere else.

Anonymous said...

We'll just have to agree to disagree on this one....none the less, you have one of the most informative real estate blogs out there.

If you torture data sufficiently, it will confess to almost anything. -Fred
Menger, chemistry professor (1937- )