Housing Pricing and Tax Credit for Home Buyers
Most will agree housing prices were inflated by an artificial bubble. There were multiple causes for this, one of them being interest rates were very low making mortgages easier than normal to obtain. Housing prices must be allowed to readjust downwards eliminating the previous inflation in price.
Keynesian economic policy is to replace the lack of private sector demand during a recession with government “public” sector demand. The underlying assumption is the original private sector demand was correct.
The response of providing tax credit to home buyers seems to make sense on the surface as it provides them assistance and encourages more people to purchase homes. On further analysis, the tax credit really only helps the seller by allowing them to charge that much more for the price of the home. This keeps housing prices from falling further and reaching their true market equilibrium price.
The original private sector demand in the housing market was incorrect and fueled by a artificial bubble. The market will force a correction. We can either allow the correction to quickly occur and move on, or we can prolong it with the risk of making it worse through intervention and market manipulation.
Cato – Republicans Just as Guilty of Flawed Keynesian Thinking