The Punch Bowl Gets Taken Away

Home sales in the U.S. have been artificially supported by the First-Time Buyer's Credit, which is due to expire at the end of next month. Because of the time necessary to process new mortgage applications, the window has already effectively closed. Look (above) at what happened to mortgage apps last week. According to survey data released this morning by the Mortgage Bankers Association (MBA), its Market Composite Index, a measure of mortgage loan application volume, decreased 13.7 percent on a seasonally adjusted basis from one week earlier. Without the adjustment for the Columbus Day holiday, the index actually decreased 22.4 percent. Oops.

[update, one week later:]

Realtors, lenders, and builders will undoubtedly point to the latest kink in the data series as proof that the Buyer's Credit should be extended. The $8,000 credit essentially covers the down payment for a cash-strapped purchaser. But Rex Nutting at MarketWatch argues that the subsidy is wasteful. Of the million-plus claims that have been filed so far, as many as two-thirds have been for transactions that would have taken place anyway, with or without the credit. Subtract those out, and the real cost to the government of each additional sale under this program is $43,000. "The last thing we need in this country," says Nutting, "is more houses, or a temporary floor under prices or more government incentives to buy a home without putting any of your own money at risk."

Actually, Rex, the very last thing we need in this country is more fraud. It is bad enough that banks are ripping off taxpayers; now taxpayers are ripping off each other. The $43K figure mentioned above does not capture the costs of weeding out fraudulent claims, which (as reported by the Wall Street Journal here) could be one of every ten. In testimony to Congress, the Treasury Inspector General for Tax Administration recommends that the Internal Revenue Service demand more thorough documentation before granting the credits. No credits before closing, no credits for second homes, no credits for 4-year-olds.

A handout meant to grow green shoots creates red tape instead. I know, hard to believe.