First-Time Homebuyer Tax Credit, an Unmitigated Failure

At the risk of beating a dead horse I’d like to highlight very clearly exactly why the first-time homebuyer tax credit should unambiguously be considered failed policy that did (and will continue to do) far more harm than good.

Recall that before its implementation the main argument against the policy was that by incentivizing home purchases, the government was at best forestalling the inevitable completion of the correction occurring in the nation’s housing markets while simultaneously encouraging millions of hapless American households to leverage up large debt burdens at the very moment when deleveraging was clearly the more prudent financial direction.

In a sense, big government was showing their behavioral economic prowess exploiting the human compulsion for immediacy by dangling an $8000 payoff just over the heads of an American populace that has been shown to be largely incapable of comprehending even the most basic of financial decisions.

While the “winners” of this bribe likely gained a sense that government had offered them a “no-brainer” proposition, these unwitting rubes likely had no idea that the government was dangling their “gift” over an abyss of home price deflation.

Further, one of the more interesting effects of the failed policy was that it appears to have encouraged a notable rise in inventory as side-lined sellers determined that their best opportunity to dump their bad asset was under the guise of the government’s smokescreen housing effort.

All told, the government scam worked just about as predicted, new and existing home sales spiked up just ahead of each of the credit expirations (November 2009 and April 2010), homebuilder’s simultaneously registered significant increases in buyer traffic, prices trended up with the increase in transactions and inventory increased as sellers perceived an unique opportunity to pass off their bad asset.

As expected though, in the months following the final expiration, new and existing home sales plunged to record lows while buyer traffic pulled back to near all-time low levels and prices abruptly topped out and started to trend lower appearing to be headed back at a fresh strike at the lows set in early 2009.

Of course, this scam policy had its share of winners namely Realtors, homebuilders and crafty existing home sellers that pocketed hundreds of millions flipping (or assisting in flipping) junk housing assets on to the balance sheet of a fresh population of previously unexploited households.

Finally, as prices continue to decline in coming months look for a notable jump up in foreclosures as many of these “stimulated” home sales mature and season into unmitigated failures, a perfect reflection of the worth of the policy itself.

Scam of the Century

The Realtors backed it… the home builders backed it… the mortgage bankers backed it… virtually anyone with an financial interest in residential real estate transactions backed the Homebuyer Tax Credit (and it’s expanded extension) and now that the program is finally complete and a whole host of indicators (NAHB builder sentiment, pending home sales, existing home sales, home prices, etc.) suggest that the its effects were at best temporary, we can see fairly clearly that this policy was a scam of epic proportions benefiting few and costing many.

Reports indicate that the total credit cost could exceed $20 billion and while the cost of administration and vetting of claims is yet to be determined, it can safely be assumed to have been very costly, so what did we get for our Keynesian tax stimulus efforts?

First, it’s important to recall that early on in the program implementation it was reported that there was a massive number of fraudulently filed claims with thousands coming from inmates, children and tax preparers supposedly acting without the knowledge of filers that did not purchase homes.

Needless to say, the IRS has been busy with audits, so much so that as of June they blocked or froze over a billion dollars of claim payments.

As for properly filed claims, many of the homes purchased with the credit have already declined in value in excess of the credit’s maximum $8000 benefit (i.e. a mere 2.5% decline on a $350,000 home) leaving many unwitting home “buyers” in the cruel predicament of sinking in a quicksand of asset price deflation for simply having jumped for a slight nibble of the government’s meager tax carrot.

Finally, in trying to fully understand why the government undertook such a useless and poorly calculated program, it’s important to recognize those who truly walk away from this policy in better standing.

Realtors, home builders and mortgage bankers…. some of the most notable culprits of the housing bubble years… all walk away cleanly skimming the proceeds coming from the transactions of an estimated 2 million temporarily stimulated home purchases.

It should come as no surprise that these were the very same industry groups that worked tirelessly lobbying to enact this failed policy… it was a simple exchange… your tax dollars to their wallets.

While Washington elites likely continue to celebrate the “success” of this ludicrous policy, those opposed can at least draw some consolation from the recent refusal of NJ governor Christie’s to enact a similar program possibly indicating that public sentiment has turned against such overtly illogical and wasteful government efforts.

Goldman Tidbits

Anyone really surprised that this is the way the big Wall Street investment banks work?

The system is rigged ... it’s just that simple…

Tidbits from the complaint:

Portions of an email in French and English sent by Tourre to a friend on January 23, 2007 stated, in English translation where applicable: “More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!”

(SAT: Tourre an Executive Director at Goldman Sachs is now only 31 years old)

Similarly, an email on February 11, 2007 to Tourre from the head of the GS&Co structured product correlation trading desk stated in part, “the cdo biz is dead we don’t have a lot of time left.”

(SAT: Keep in mind that Tourre was responsible for structuring and marketing CDOs that are now alleged to have been purposely created for failure.)

A Paulson employee explained the investment opportunity as of January 2007 as follows:

“It is true that the market is not pricing the subprime RMBS wipeout scenario. In my opinion this situation is due to the fact that rating agencies, CDO managers and underwriters have all the incentives to keep the game going, while ‘real money’ investors have neither the analytical tools nor the institutional framework to take action before the losses that one could anticipate based [on] the ‘news’ available everywhere are actually realized.”