Five Reasons the U.S. Doesn't Need More Home-Buyer Perks

Congress is working on a new and even more generous set of perks for house buyers. A tentative deal in the U.S. Senate would extend the closing deadline for an $8,000 subsidy for first-time buyers to July 1 from Nov. 30. It would also boost the program's income limits for singles to $125,000 from $75,000 and for couples to $250,000 from $150,000, and would offer a new $6,500 reward for existing homeowners who buy again. (More on the home buyer tax credit.)

The National Association of Realtors has called such an extension "essential." The Mortgage Bankers Association agrees. The National Association of Home Builders says, "Failure to act now could derail the fragile housing recovery even before it has time to take root."

I respectfully disagree for perhaps a dozen reasons. Let me offer five.

• Subsidies raise prices, and house prices are already too high.

Consumer subsidies puff up buying power, which artificially increases demand, which raises prices. With most goods, manufacturers respond by increasing supply, which brings costs back down. Some goods face constraints to new supply, though. We can build more colleges, but we can't magically make more of the longstanding, prestigious kind. We can make more pills, but we can't violate drug makers' patents on popular ones. And we can build new houses, but there's only so much space (or building permission) in the choicest locations. That produces a paradox: America's government has for decades spent mightily on affordability initiatives for college courses, health care and houses, and yet prices for all three goods have increased faster than the rate of inflation, resulting in less affordability.

In April 2007 I wrote that houses had gotten so expensive that renting had come to make more financial sense. In July, with prices down about 30% nationwide, I charted them against rents and incomes to show that the country was closing in on its historical level of housing affordability, but wasn't quite there yet. It never did get there. Prices in most markets have increased each month since then. We're moving away from normal, not toward it. When the National Association of Home Builders speaks of a "fragile housing recovery," it means an increase in prices. But what about a recovery of the ability of ordinary Americans to buy houses at fair prices? That recovery might have to wait.

Read more here>