New U.S. home sales were flat in August and existing home sales fell, showing that the housing sector still remains weak. Ted Gayer, co-director of Economic Studies, says there has been some housing stabilization thanks to the Federal Reserve, but that there is still downside risk in the market. Costly tax incentives to encourage homeownership have long-term budget consequences.
“I think right now the housing market is showing increased activity compared to where it was a few months ago. We’ve got a little bit of an uptick in housing prices in the summer. Inventories of new and existing home sales are down a bit but not where they need to be to suggest a strong market. So it is still soft and there is some substantial downside risk moving forward. You can’t have great confidence that we have turned the corner but we’re definitely better off than we were in the previous year.”
“…The Federal Reserve’s reports suggested that the housing activity has been up in recent months which I think is spot on. But they are indicating in their actions that they realize that it is a soft market as well. They have been buying quite a substantial amount of Freddie and Fannie mortgage-backed securities and they have announced that they will continue to do so building up to $1.25 trillion of purchases and that they are going to phase it out by the end of the first quarter of 2010. So right now they are the only providers of liquidity in the mortgage finance market and it is an open question of what will happen to that market and to mortgage interest rates once they start pulling out and whether or not the private sector will be able to step in.”
“…I think we shouldn’t lose sight of the big picture here. The big picture is that all of these expenses and all of these stimulus packages do have consequences. They are not a free lunch. We had the “Cash for Clunkers” program which I thought was not a very wise program in that we ended up spending a lot more on that than we originally intended. And then we had the first time homebuyer tax credit which wound up coming in at about $15 billion and now there’s talk of expanding it and increasing eligibility. It could be $30, $50 billion more. All of these costs will have to be paid for in higher taxes in the future and these higher taxes are harmful to the economy. And finally, I think we should be aware of our debt burden. Anybody who sees the [Congressional Budget Office’s] estimates of our debt going forward should be fearful of those numbers, and, at the very least, we should be very cautious before doing things like expanding a tax credit that is so poorly targeted.”