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Housing's Worst Nightmare

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"This is obviously bad economics, but it must be good politics."

That's how the finance blog Calculated Risk described last year's extension of the $8,000 first-time homebuyers' credit, which finally expired in April. You have to bury your head in the sand to disagree.  

Since the credit crisis began in 2008, its imminent downside has been obvious: If you pay people to purchase a house, and there's an expiration date on that incentive, those who planned to buy in the near future will just speed up their purchase. Sales that would have been spread out over the future get pulled into the period before the credit ends as buyers rush to cash in. Add it up, and you get a big spike just before the credit ends, and a category 5 hangover thereafter.

That's what's happening now. After new home sales surged in April, May's numbers collapsed by almost a third to the lowest level since we started keeping track in 1963. Mortgage applications also fell to the lowest level since 1997, and existing home sales fell 2.2%.

Housing, there's your worst nightmare.

Shocked. Shocked!
What's astounding are the commentators and investors taken aback by this. In the past month, Beazer Homes (NYSE: BZH  ) , Hovnanian (NYSE: HOV  ) , Toll Brothers (NYSE: TOL  ) , and PulteGroup (NYSE: PHM  ) are all down between 15%-35%, likely reflecting the understanding that business will wane after we stop paying people to buy homes.

But who in their right mind didn't see this coming? We already had front-row seats to this movie: Recall what happened last September after the Cash for Clunkers program expired. "General Motors' US sales crashed in September, falling 45 per cent after the expiration of the popular government-funded Cash for Clunkers program," wrote one newspaper. No kidding?  

None of this should be surprising. A few months ago, a friend of mine who utilized the credit asked, "I was going to buy this fall, but I figured, with the $8,000 credit, why not buy now?" From his self-seeking perspective, he's right. But for the economy's sake, wait until this fall. Then you'll see why.

Or just listen to the credit's supporters. Senator Johnny Isakson admits "that a lot of people who got the credit ... might have bought in 2012 or 2013. This got them to buy in 2009 and 2010, when we needed to shore things up." True. But now you'll need to shore things up in 2012 and 2013. Presumably, that'll be done by sacrificing 2014's sales, then 2015's ... and around and around we go. It's no different than passing a law that moves Christmas's official date to tomorrow in an attempt to cure mass depression. You'll make millions happy tomorrow, but every pharmacy will be sold out of Prozac come December 25.

Say it with me, Fools: Stimulus designed to frontload sales only produces a sugar high, and comes directly at the expense of future sales.

Money to burn
To be fair, and only because I can already hear some of you booing, there are homebuyers who bought a house solely because of this credit, which is legitimately stimulative. Zillow.com ran a survey last fall and found that 18% of buyers who might receive the credit called it their "primary influence" for buying.

But that number is pathetic, and leaves 82% who probably would have bought anyway, or just sped up their purchase in order to cash in. The credit was doled out in amounts up to $8,000, but estimates of its cost range from $44,000-$100,000 per additional sale that wouldn't have occurred in its absence. Even by the government's standards, that's impressively inefficient.  

There is a silver lining here. The sales dearth bound to take place in the coming months will likely push prices down. When that happens, housing trade groups and their lobbyists will groan loudly. Ignore them. The truth is that falling prices and the increased demand that comes from it is the only way to solve our housing problem. The inability to admit this has been the rationale behind most housing stimulus measures over the past two years. It's cost a lot of money, and prolonged a good amount of agony.

So I guess there's another silver lining: The first-time buyers' credit is history, and now housing can get back to normalcy. In that case, maybe the nightmare's over.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.


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Morgan Housel
TMFHousel

Economics and finance columnist for Fool.com. Analyst, Motley Fool One.

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11/26/2014 4:04 PM
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