June 11, 2009 11:07AM

Senators Want to Delay Housing Recovery

As discussed in a recent Bloomberg piece, several U.S. senators from both parties are pushing to almost double the recently enacted $8,000 tax credit for first‐​time homebuyers to $15,000. The same senators are also pushing to remove the current income restrictions — $75,000 for individuals and $150,000 for couples — while also removing the first‐​time buyer requirement.

The intent of the increase, and the original credit, is to increase the demand for housing and to create a “bottom” to the housing market. The flaw of this approach is that it creates a false bottom, one characterized by government‐​inflated prices and not fundamentals. It was excessive government subsidies into housing that helped create the housing bubble, additional subsidies to re‐​inflate the bubble will only prolong the actual market adjustment.

If it were only a matter of prolonging the adjustment, then the huge cost of the tax credit might be easier to justify. Yet by encouraging increased housing production, the tax credit will increase supply when we already have a huge glut of housing. Despite housing starts being near 50‐​year lows, there is still too much construction going on. The way to spur demand in housing is the same way you spur demand in any market: you cut prices.

Removing the income limits makes clear the real intention of the tax credit, to help the wealthiest households. About three‐​fourths of existing families already fall under the income cap of $75,000. As we move up the income latter, home equity makes up a smaller percentage of one’s total wealth. The richest families can make do with a decline in their housing wealth and continue spending; they have other substantial sources of wealth. If we have learned anything from the housing boom and bust, it should be that continued government efforts to rearrange the housing market have been costly failures.