Tuesday, March 31, 2009

Responding to Incentives

I know of a married couple that intends to sell their house. And they are smart. They intend to wait until this summer, when some new government incentives (and disincentives) kick in. As I understand the program, first time home buyers will be eligible for an $8,000 tax break as well as 4% interest rates.

All righty then. Our government will soon be implementing a program that give advantages to first time buyers, coupled with disadvantages for those who have previously purchased a home.

So what should a home seller do? Well, the home sellers that I know intend to target first time home buyers in their marketing efforts. Now these folks don't really care whether the buyer of their home is a first time buyer or a hundredth time buyer. What they want is to sell their house for as much as they can. And they think that they can get the most out of first time buyers. And in my view, they may well be correct.

The net result of this new government favoritism toward first time buyers? First time buyers will be able to bid up the price on homes because they have a significant, government provided subsidy. This will artificially drive up the price of homes. Thus second time home buyers will have to pay more for a house.

Why the government should punish people because they have owned or currently own a home is beyond me.

4 comments:

Caledonication said...

Well, yes and no. The incentives have already kicked in. The first time home buyers tax break is something which is received well after the home is purchased. It is actually received as part of one's tax refund the following year. It's not like someone gets a check, then goes and buys a house having an extra $8,000 to use. If anything, the recipients are much more likely to use the money to furnish the house. Also, if this has the same rules as last years $7500 tax (loan) credit, a first time home buyer is defined as; someone who has not owned a house in the previous three years. What this may accomplish is to prod some renters into purchasing their own property. In my opinion, I highly doubt this little PR stunt will drive the price of houses up. Houses are not selling like they used to. People are losing their jobs or are afraid of losing their jobs. They are losing money on their investments. I think this prevents them from taking the plunge in the first place. Additionally, I don't see how this can directly hurt sellers as they already have a home. The real damage to existing homeowners is the inflated values of their homes has diminished.

I think the bigger concern is how our government is punishing everyone with the even bigger PR stunt, called the stimulus package.

And finally, shame on you for not returning my call.

Anonymous said...
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Anonymous said...

Your economics is off. The big problem in the economy right now is a lack of a demand. We've got supply in spades. So incentives (i.e. tax cuts) are needed in this case to sop up a housing market that has way too many homes for sale. That's driving down prices, in same cases 15-20 percent, for all buyers - first or hundredth. There's another proposal out there to give all homebuyers a $15,000 tax credit. Some call it too expensive, but the home-building industry says it's exactly what's needed to solidify the market and get people back to work. Something needs to be done to stimulate demand - the tax credit may be just the thing.

Caledonication - You listen to too much talk radio. The stimulus bill is about putting hard-working people back to work. Again, for many reasons, the economy is screwed because everyone is risk averse at the moment. Government - really the only 'too big to fail' entity out there - is trying to jump start the economy by employing people the market is too scared to employ. Without stimulus, unemployment would stagnate through the summer and multiply through the economy because no one has any money to spend.

Conservative media have done a good job of turning the economy into a club to use against Obama, but economics is clear on this point. Monetary policy is ineffective, so fiscal policy is the only way to stave off a long-term recession, i.e., Depression.

Caledonication said...

Anon, how about keeping your personal ignorance about me to yourself? For your information I don't listen to much talk radio at all.

Since you've veered of topic to respond to my small comment about the stimulus fiasco...

As far as the economy is concerned, we obviously have differing ideas about what works and what doesn't.

What have you offered in the way of intellectual discourse?

There's another proposal out there to give all homebuyers a $15,000 tax credit. Some call it too expensive, but the home-building industry says it's exactly what's needed to solidify the market and get people back to work. Something needs to be done to stimulate demand - the tax credit may be just the thing.

Of course "the home-building industry says it's exactly what's needed". If you built homes wouldn't you want the government to create incentives for your financial benefit? Who cares what the "home-building industry says is exactly what's needed"? That's like the insurance industry lobbying to not have to cover certain medical conditions. The cliche could be perhaps, it will drive down costs for everyone. Truth is, the interests are self served. As I said above (and I am correct), the tax credit / loans for buying homes are "after the fact" incentives. If you don't have the money (or credit) to buy the house in the first place, you will not see any incentive dollars showing up on your tax return next year. Period. Pretty straightforward.


The stimulus bill is about putting hard-working people back to work.

Typical liberal cliche' (TLC). No. It is not about putting "hard-working people back to work". It's about pushing pet projects through at the expense of taxpayers, attractively packaged in a feel good wrapper. If you follow the news, you must surely have seen how this package was going to "create" four million jobs, then that changed to create "and save" three hundred thousand jobs, then it changed to "save and create" one hundred fifty thousand jobs. Why don't you take a stab at elaborating how the stimulus package aims to do this? You'll need to explain how this is done without costing taxpayers more than the "job" produces.


Again, for many reasons, the economy is screwed because everyone is risk averse at the moment.

Hmmm, who's everyone? My mortgage guy just called me on Friday to let me know that rates are down to 4.8%. Doesn't sound like a risk averse climate to me. Stocks are so low that many of my friends are jumping on them. Right now is prime for creating generational wealth. Unfortunately, after Obama and his minions are through, most of that profit will be going to the massive black hole created by the national debt.


Government - really the only 'too big to fail' entity out there - is trying to jump start the economy by employing people the market is too scared to employ.

Based on the incorrect assumption that the stimulus bill actually creates any meaningful, productive employment and simply repeating the previous TLC.


Without stimulus, unemployment would stagnate through the summer and multiply through the economy because no one has any money to spend.

Could you repeat that TLC at least one more time? No one has any money to spend? Please, give us a break. Just because many more people are becoming more responsible in their spending, doesn't mean no one has any money to spend. Granted, a lot of people can fall on hard times for various reasons, this is nothing new. But, people living beyond their means is the reason why most people who are broke, are broke.


Conservative media have done a good job of turning the economy into a club to use against Obama, but economics is clear on this point.

Ooooooh! Conservative media! What's that? Five percent of everything that is shoved down your throat? Newsflash for you. Conservatives are not the only ones who want to club Obama. And, incidentally, your understanding of economics (or lack thereof) is as clear as mud.

Monetary policy is ineffective, so fiscal policy is the only way to stave off a long-term recession, i.e., Depression.

Gobbledegook.