Economic Notes: Giving the Credit Credit
8/26/2010
By Patrick O'Keefe, Director of Economic Research, J.H. Cohn
New home sales
hit a recordkeeping low in July. The end of eligibility for the Federal homebuyer tax credit in April has been blamed for the drop. But does it deserve the credit?
Although circumstantial, the following data suggest that the credit’s demise caused the collapse:
- Sales of both existing and new homes have fallen by one-third since eligibility for the credit expired in April;
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Pending home sales
(contracts pending closing) were off only slightly less (-31.7%); and
-
Prices
and interest rates were both lower in July than in April, which cet par should have increased sales.
A sharp decline in sales was expected. But, while many have been quick to proclaim a double-dip in housing, it may be imprudent to draw inferences about the housing sector’s future from its recent past.
The credit did not fundamentally address the sector’s longer term impediments to recovery, including inter alia: weak economic fundamentals (viz., employment and after-tax incomes), diminished household net worth, financing constraints, regional surpluses, and inter-generational imbalances.
Simply put: in too many places there is too much housing whose owners (or builders) cannot afford to sell at prices that job-insecure purchasers can finance. Economic growth (and inflation) will eventually address these incongruities; but as the experience subsequent to the early-1990s bust suggests, it will take several years – in some regions even longer.
In that context, the credit had the potential, on the margin, to accelerate the timing of purchases that would have otherwise occurred after its scheduled demise. The sharp drop-off in post-credit sales (and contracts) suggests that the credit achieved that end.
Some unknown portion of March and April’s gains was borrowed from the post-credit months. Even so, it enabled builders to reduce inventory by controlling the pace of construction—which should benefit them going forward.
Just as it is premature to assess the extent to which the credit accelerated sales, it is too soon for conjecture about the degree to which other factors (e.g., job growth, rising net worth) may have reduced the impediments to housing’s long-term recovery.
Credit the credit for the spring’s increases and the summer’s slump. It wasn’t designed to do much else.
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The statements, opinions, and conclusions contained herein are based solely upon the author’s own studies, research, and personal experience. Neither J.H. Cohn LLP nor the author makes any representation or warranty as to the accuracy or completeness of this information. J.H. Cohn LLP and the author expressly disclaim any liability for any loss or damage which may be incurred, of any kind whatsoever, as a result of or arising from the use of any of the information contained herein or reliance on the accuracy or completeness of it.
Patrick J. O’Keefe is director of economic research at J.H. Cohn LLP. He can be reached at pokeefe@jhcohn.com or 877-704-3500.