Big decision looms for U.S. government, and for one economist

Posted by Rob Minton
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If you pay attention at all to the real estate market in the United States, you know why Nov. 30 is such an important day.

That's the day the current first-time home buyer tax credit is set to expire. For first-time buyers to earn the credit, worth 10-percent of the purchase price of their new home up to $8,000, they must close their transaction by Nov. 30.

Unless, that is, the federal government decides to extend the credit.

Now, I'm not an economist and am not going to pretend to know all the pros and cons of extending this credit. I am, however, a "common sense" kind of guy, and it's not hard to piece together some common sense when it comes to this credit:

1. The severely depressed housing market was/is probably the biggest factor that kept the economy in recession.

2. Everyone seemed to agree the housing problem needed to be fixed.

3. Since the tax credit was announced, inventories of unsold homes have gone down as home sales have risen for the past four months, and even prices seem to be stablilizing.

With such a big problem improving -- but not completely fixed yet -- and that improvement being attributed to the tax credit, it's easy to see the on-the-surface benefit of extending the credit.

I understand it costs money. But so did the hundreds of billions that went to Wall Street. And this benefit, which so far has cost about $15 billion, seems to be posting direct results. It's finally a benefit for the average consumer, who, like it or not, is going to be ultimately responsible for spending us out of this recession.

I admit, I am a member of the National Association of Realtors, which is strongly advocating the extension of the credit. Their interest, of course, is in the success of Realtors, who get paid when houses are selling. But I see the benefit extending way past real estate agents.

If it's helping improve property values, the number of home owners "underwater" in their mortages is theortecically going to decline. That would lead to fewer foreclosures, I firmly believe -- people are walking away from homes in droves largely because of their negative equity positions; pure math makes it the logical choice.

A restoration of equity would better for borrowers, better for banks. If the government really wants to stop foreclosures and help reduce banks loan defaults, prop up home values. Make refinancing easier by clearing the path for equity to be restored.

Is this manipulating the market, sure? But so was bailing out the auto industry and the banks. So was Cash for Clunkers. So at this point, does it matter? And the well-being of housing market, I think most of us will agree, is more vital to the nation's economic health than the automakers' well-being. If the government's going to have it's hands in everything anyway, put those hands to work where they're most needed.

Moody's chief economist Mark Zandi, who follows the real estate market, supports extending the credit. According to an Associated Press story, he said it's too early for our decision-makers in Washington to step away from the market, "the risk is too high."

So far, those policy-makers in Washington have largely been mum on the likelihood of an extension. Which brings me to Dean Baker, who has not been mum.

(This is the point in this post where I can choose to avoid controversy or dive right in. So, naturally, we'll dive right in)

Baker is the well-respected economist who founded the Center Economic and Policy Research, a Washington "think-tank," for lack of a better word. In 2002, he was one of the first to predict a disastrous burst of the housing bubble, an early-warning shot for which he deserves much credit.

He is completely against an extension of the tax credit now.

"It's really bad policy," Baker told the Associated Press. "You're throwing a lot of money, in my mind, in the garbage."

Baker would rather see the money go to unemployment, food stamps, and aid to state and local governments, according to the AP article.

Here's what you should know about the Center for Economic and Policy Research: It sounds all official, like a government agency, but really it's a lobbying tool for liberal causes. I don't mean it leans left; I mean it's practically falling over. Which is fine; I don't have a problem with that.

I don't have a problem with Dean Baker being opposed to the tax credit extension, either, really. He's a proponent of affordable housing, and it would seem that an extension of the credit would help property values creep up further. I don't have a problem with his believing higher property values hurt the less forturnate in our country. I don't have a problem with his desire to see money go toward unemployment and hunger, which are huge issues for many in this country.

I DO sort of have a problem with one little thing. According to the AP article mentioned above, guess who is one of the expected 400,000 or so who have, or will, take advantage of the tax credit?

Dean Baker.

Which is fine, he's entitled to it. But here's the thing about tax credits: You don't have to take them.

If Dean Baker really is one of the buyers entitled to his $8,000 but thinks by giving him this credit his government is "throwing it in the garbage," then he shouldn't claim the credit when he does his 2009 taxes. I really think it's that simple.

Take it out of the garbage, Mr. Baker, and give it back to your government. Put your money where your mouth is.

As congress and the administration have a big decision to make regarding the extension of this tax credit, so, apparently, does one well-known economist.

Comments

[Carlos Samaniego]

Rob, great article well thought out and I agree with you 100%