Why The First Time Home Buyer Credit Is Terrible For The Economy

By Kevin (Staff Writer), on November 4, 2009

The first-time home buyer tax credit extension cleared a hurdle in the Senate today with a 98-0 vote, and it could be a done deal if approved by the House this week. All over the U.S., there is an increasingly heated argument over the benefits of the First Time Home Buyers Credit and this extension. The program has been touted as one of many remedies for our economic woe, specifically it’s used to prop up the sluggish housing sector.  Before, you make up your mind on whether or not this popular program should be extended, I encourage you to read on and consider why I believe this policy is terrible for our economy.

Photo by woodleywonderworks via Flickr

The Net Effect Is Zero

First and foremost, government programs to motivate spending such as Cash For Clunkers or First Time Home Buyer Credit do nothing for the economy for the long-term.  They provide short-term boosts in consumption by moving demand around.

In order to stimulate the housing sector and prop it up, we need additional buyers — have more buyers than sellers and prices go up. The combination of buyers and sellers is what moves prices up or down. Therefore, the government decides to find a way to bring more buyers to the market.  By offering first time home buyers a tax credit, you accomplish the task.

But, the question becomes: where are these buyers coming from? They’re coming from the future. Individuals that would most likely buy a home for the first time in 2011 or 2012 or beyond are being moved forward to buy a home in 2009.  Great, right?  Well, what about the housing market in 2011?  Won’t we need first time buyers then?  Yes, we will if we want the market to continue to move higher.  A logical thinker concludes that this is not a sustainable path.  But politicians conclude that the future is someone else’s problem — I’m up for re-election in 2010!

You see, no extra demand is created.  Instead, it is merely moved around.  Now, this isn’t necessarily the worst case scenario, but if you begin to factor in the cost of simply moving demand around, the scenario becomes worse.  Borrowing money, raising taxes or printing the money in order to move housing demand forward (which is unsustainable) is a terrible policy that results in higher deficits or inflation.  We’re stealing from our future in order to stimulate housing in 2009.

Furthermore, there has been rampant reports of corruption and fraud by people fraudulently claiming the first time home buyers credit.  Most government programs come with significant levels of fraud.

Some Key Things To Remember About Government Incentives

First, just because a government policy is popular, it doesn’t mean it is effective.  One thing certain is that if a policy is popular, it will be extended for political gain; but let’s get back to the whole effectiveness issue.  Let’s say for example, our leaders decided to give everyone some crisp new green backs and give every American a million dollars.  Would that be popular?  Of course!  We’re all rich! But, people who understand economics and monetary policy knows this wouldn’t have the effect that people think.  All this would do is raise prices of everything from houses to iPods, the net gain in purchasing power (real wealth) would be nonexistent.

The second key to remember is that government has nothing.  In order to give something, it must first take it from elsewhere.  So, to give money in the form of a stimulus, government must take it in the form of taxes (or print it which leads to inflation).  People assume that government programs come from this vault of money that is “government money”.  There is no such thing.  It is our money that the government has taken from us via taxation.

Lastly, government programs are created through political motivation.  Politically motivated economic policies are terribly inefficient at stimulating the economy or providing real value when compared to letting the actual economy work.  Let’s say that the government dished out $100 billion in tax credits for first time home buyers.  This $100 billion was taken out of the private market and spent according to political means.  Where would the $100 billion have been allocated if government was not in charge of allocating it?  It would have naturally flown into areas that are still productive (i.e. technology, factories, small businesses).  Instead, we will have a boost to housing which means we are allocating more money and resources into building houses that we don’t need.

Most of all, remember that the government has political interests.  They’re focused on polls and elections.  They will sacrifice long term prosperity for a short term boost to the economy if it means re-election.  Is that really the best path economically?  I encourage you to challenge the government incentive programs that are being thrown at you to spend your money.  Consider the cost of these programs, and consider the real long-term impact.  I think you will see that we don’t need them.

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Kevin is the writer behind 20smoney.com. 20smoney.com focuses on aggressive investing, developing income streams, money management and more with advice targeting 20-somethings. You can read more about his investing and financial philosophy.

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