Homebuyer tax credit

Last week, I came across an article about the effort to extend and expand the Homebuyer Tax Credit. I hadn't been paying much attention to this particular effort, but in a nutshell, the idea is to extend it beyond Nov. 30, when the original is due to expire. It would be expanded by making it a $15,000 tax credit rather than $8,000 and by making it available to anyone who buys a house, as opposed to limiting it to "first-time" home buyers, as it is currently.

All of this struck me as a bad idea. For two main reasons, primarily.

1. The nation simply can't afford to subsidize home purchases at this point, most of which are going to happen with or without the tax credit. As this article points out, relatively few marginal home sales are being added as a result of the credit, yet the cost is extremely significant. The pair of studies cited in the article indicate the expanded subsidy would cost an incredible $133,000-$292,000 per additional house sold.
2. The basic laws of supply and demand haven't been repealed, despite our efforts to end-run them with credits and other government subsidies. We need to quit enticing marginal home buyers by allowing them to purchase with little to no equity - which is exactly what this subsidy is designed to do. And painful though the process may be, we need to allow real home price discovery to happen. That is what will ultimately begin to clear inventory. Trying to short-circuit this process prolongs the pain and pushes true price discovery further into the future.

Imagine my surprise when I learned that this seemingly misguided piece of legislation had attracted numerous sponsors that I tend to view as normally conservative votes (view them in the fifth paragraph here). I'm still scratching my head, frankly. I sent off an electronic letter to my senator, Sen. Jim Bunning (R-Ky.), asking him to help me understand how he can be for this when he's lined up reliably against most of the other bailout/subsidy stuff. We'll see what kind of response I get.

Bad/good news arrived on this issue today, though. Reports that "[t]ens of thousands of people may have taken advantage of the first-time home buyer tax credit to defraud the government" should make passing the extension/expansion that much more difficult.
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Mark Biller is Sound Mind Investing's Executive Editor. Visit www.soundmindinvesting.com to learn more.