The Real Estate Bloggers

Federal Tax Credit Expiration Increases Risk of Double Dip Recession in Housing Market

Posted: 12 Jul 2010 04:27 AM PDT

If you are paying attention to the experts these days you will hear the term double dip recession being used quite regularly. It is still not being discussed on the evening news broadcasts, yet, but that is because the news bureaus have a much different agenda for you.

However the economists and those that follow the news closely all seem to feel that there is a very good chance that instead of a recovery, we are facing a double dip.

Led by real estate.

So the market intervention created a small surge in home buying while it was in effect, and then depressed purchases until the credit is reintroduced. Thus, in an effort to buttress the economy, the credit program increased volatility in the housing market.
Such an outcome was, sadly, as predictable as can be. A 2003 study of Keynesian policies in 91 countries performed by economists Antonio Fatás and Ilian Mihov and published in the Quarterly Journal of Economics, concluded that, “governments that use fiscal policy aggressively induce significant macroeconomic instability.”
From now on, economic releases should have the following disclaimer in an opening footnote, “The economic roller coaster you are riding has been presented to you by your friendly neighborhood Keynesians. via Businessweek

Housing markets in decline need to have a firm bottom to rebound from. Home buyers, long told that their home is their biggest investment, do not want to lose value on the properties they are buying. They will postpone or decline to make a purchase if they can not see the upside of the deal in many instances.

The government trying to jump start the housing market has instead created a short term burst of activity while providing very little long term value to the market. Instead of stabilizing the prices of real estate, it created a mini bubble by bringing in the uninitiated buyers into the market.

Now we are left in a situation where housing prices are still uncertain, buyer activity of homes is at the lowest level since we started keeping statistics, and doubt is a key component of the real estate market.

That is not a healthy brew. In fact, it is a Keynesian nightmare.

Sounds like we need a little Hayek these days.

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Federal Tax Credit Expiration Increases Risk of Double Dip Recession in Housing Market