MarketWatch: Kill the Credit

MarketWatch Washington bureau chief Rex Nutting argues against renewing the first-time home buyer tax credit:

The tax credit is an extremely ineffective stimulus, and like the TARP, it mainly rewards the very people who got us into this mess. ... Also, the tax credit gets the economic incentives all wrong. ...

The National Association of Realtors says about 2 million new buyers will take advantage of the subsidy this year, but the real-estate lobbying group admits that the vast majority of those buyers would have bought a home without any subsidy.

Most of the subsidy is wasted. ... It's expensive, but the worst thing about the subsidy is that it doesn't address the issue of oversupply, which is the main reason prices have fallen so much.

Most first-time buyers move from renting to owning a house. That subtracts one home from the vacancy list, but adds an apartment. The net change is zero. There is little gain for the economy.

In the second quarter, a record 4.4 million apartments were vacant (a record 10.6% of all units) and there were 1.9 million vacant dwellings that typically were occupied by the owner. The housing problem in America isn't that home prices are falling; it's that there are so many vacancies that prices must fall. Incomes did not rise as fast as home prices did, so many families simply can't afford current prices. The laws of supply and demand have not been repealed. ...

The tax credit is designed so a buyer can use it for a down payment. Combined with another flawed government plan to recreate subprime lending inside the Federal Housing Administration, the tax credit encourages more buyers to put less of their own money down.

The one thing we know about foreclosures is that they are much more likely if the owner has no equity. So the tax credit, which was designed to reduce foreclosures by helping to prop up prices, actually will lead to more defaults as already stretched buyers lose their jobs.

Remember, the first-time home buyer tax credit is costing $43,000 for every extra home sold. That's a massive waste of your money just to transfer an existing home from one person to another.