Monday, March 02, 2009

Samuelson - Wrong Turn on Housing

Housing started the down turn and we need housing to revive. Robert Samuelson has a very good proposal. RealClearPolitics - Articles - Wrong Turn on Housing: ... Shouldn't lower prices spur demand? Well, yes. There are many theories as to why they haven't. Perhaps prospective buyers can't get loans. Or people are so gloomy that they're afraid to buy. But the most important explanation is probably deflationary psychology. If yesterday's $250,000 house is now $200,000, it may be $175,000 by June. Waiting is better. Unless this deflationary psychology is broken, it becomes self-fulfilling. The more buyers wait, the more prices fall; and the more prices fall, the more buyers wait. The Obama administration essentially ignores this problem, though it can be addressed. The simplest way is to bribe prospective buyers not to wait. For example: Give them a 10 percent tax credit, up to $15,000, on the purchase price of a new home. Anyone who bought a $150,000 home would get a $15,000 tax break. The credit would expire in a year. Waiting would be costly. Buyers would delay only if they thought home prices would drop as much or more. Precisely this proposal comes from the National Association of Home Builders. Normally, it would be an atrocious idea, because it would reward people who would buy anyway and would be skewed toward wealthier buyers. But now it's worth trying. Somehow, we need to cut bloated inventories (13 months of supply for unsold new homes), curb falling prices and stimulate new construction. The hope is that once buying improves, it would feed on itself. People would join from the sidelines. The NAHB says its plan would create 250,000 jobs and cost $40 billion -- big money but tiny compared with the hundreds of billions lavished on recovery programs. The Senate included the plan in its stimulus, but it was later dropped.