This past week the government announced that existing home sales plunged 27.2 percent in July while new home sales were down 12.4 percent. The numbers surprised most “mainstream” economists who expected more modest losses. Of course, with the housing market still in shambles the value of homes is expected to drop further than the $6 trillion already lost by American homeowners. This development coupled with continuing high unemployment and low consumer confidence is making many economists predict we are headed for a double-dip recession.
Now, naturally, proponents of the government’s failed stimulus policies have their excuses for why it didn’t work all lined up. They are not even waiting for the double-dip to officially hit. They are already claiming that the stimulus wasn’t spent on the right things and was simply “too small” to actually make any difference in “stimulating” the economy.
Here are the facts. First to address the issue of sinking home sales, no one should be surprised by the numbers. Home sales are way down for several reasons. First of all, Obama’s first-time home buyer’s tax credit expired in April. Folks are now waiting to see if Congress will enact a new credit before they buy. Second, all the signs are there that housing prices will continue to drop, so why rush into purchasing a property that in a few months might be gotten at an additional discount? Lastly, given the number of people in America who are unemployed, underemployed, and just downright broke it is no wonder that a huge expense like homeownership is not high on many people’s minds.
So the massive drop in home sales in July should not be surprising. Anyone who understands human behavior and even the most basic fundamentals of economics knows the president’s housing stimulus program was doomed to failure. During the time it was effective there was an increase in home sales and a leveling off of home prices, but once the program ended the bottom fell out. No lasting growth ensued. Additionally, many first time buyers who took advantage of the tax credit used it for a down payment. Essentially, the government was once again encouraging folks to buy houses who didn’t have the ability to save for a down payment. This probably represents a misallocation of scarce resources and we can expect to see many of these homebuyers on a list of foreclosures in the future.