New Housing Figures Look Dim

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This week has seen dismal new housing numbers – an unwelcome sign to those hoping for glimmers of recovery for the housing market. The bad news began on Tuesday when existing home sales for June were released revealing a drop of 27%from the previous month’s total. Wednesday brought the new home sales numbers, which were down by 12% from last month.

A large part of the drop in sales is due to the recent expiration of the housing tax credit, which front-loaded home purchases in order to qualify for the credit before it expired. Because these were primarily purchases that would have occurred anyway and were simply accelerated, home sales have subsequently plummeted now that the credit has disappeared. e21’s recent article in National Review by Chris Papagianis and Reihan Salam on the housing market explained why such a steep decline should have been expected.

Though the homebuyers’ credit was sold as a stimulus measure, we have no reason to believe that it is anything other than another wealth transfer to a large and powerful industry, one with allies conveniently situated in every congressional district. Casey Mulligan of the University of Chicago has suggested that the credit had almost no economic impact. As Harvard economist Edward Glaeser observed, it did little more than create an incentive for “mindless house swapping.” It didn’t even have a meaningful impact on the behavior of first-time homebuyers — people already planning to make purchases simply moved them forward a few months.

Though sales are down and prices are declining, a drop in housing prices may not necessarily be bad. In fact, one of the purposes of the current push to reform government involvement in the housing market would be to end subsidies which artificially prop up housing prices. In a post on “The Agenda”, Salam wrote “I’m inclined to see the upside of the coming correction. Young families who would have had a hard time getting on the housing ladder at the peak of the bubble find themselves in a stronger position”

For more on how government policies influence the housing sector and why it should be reformed, read e21’s proposal for reforming Fannie Mae and Freddie Mac by economists Don Marron and Phil Swagel.