Wednesday, June 23, 2010

Housing Market Cannot Sustain Without Government Support

Weak Housing Numbers Undermine Hopes of Recovery

The National Association of Home Builders' monthly index of builder confidence is down to levels not seen since February. That's why Harry Reid and other Senate Democrats are pushing for an extension on the $8,000 tax break being offered to first-time homebuyers.

Under the original deal, buyers who were in contract by the end of April would have until the end of June to close. If that deadline is extended, they'd have until the end of September.

The National Association of Realtors (NAR) estimates that almost one in six home buyers this year will take advantage of the tax credit.

The home buyer's tax credit was expensive, costing taxpayers over $12 billion. At that cost, the government can't prop up home sales indefinitely. And considering our government's balance sheet, it shouldn't be undergirding it at all.

What's equally troubling is that current homeowners are among those subsidizing the purchases of new owners. After all, these tax credits are funded by all taxpayers.

The government is intervening in the housing market in a desperate attempt to maintain consumer demand, and thereby GDP.

The US government, by way of Fannie Mae, Freddie Mac and the FHA, underpins about 95% of the mortgage market. The market is purely on government-provided life support.

But, right now, the patient doesn't look good.

The NAR said sales of previously owned homes slipped 2.2% in May. Sales had increased for two consecutive months due to the now-expired tax credit.

The economic data clearly reveals that consumers are still struggling. For most Americans, this recession isn't nearly over.

Meanwhile, as the government futilely attempts to prop up demand, the deficit and debt continue to swell. The 20% of Americans who are either unemployed or under-employed are paying little, if any, taxes, causing government revenues to plummet.

That only raises the deficit, the debt, and their ratio to our GDP. And without continued government support (aka, deficit-spending), our nation's GDP will be challenged to grow, and may even stagnate.

That's not how a debt-based, growth-driven economy is supposed to work. The reality is that system is irrevocably broken.

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