SmartMoney.com published an article by Jack Hough that raises some interesting questions regarding government support for the housing market, specifically, the first time home buyer tax credits of the past two years.  The premise of the article is that since the expiration of the tax credits, average home prices have significantly declined, wiping out anything gained by the credits:

This of course is only true on average.  Home price declines have been more precipitous in some markets than in others.  Just because someone purchased using the tax credit doesnt necessarily mean that they lost more than they claimed in the credit.  For instance according to the most recent S&P/Case-Shiller Home Price Index, prices in Boston are down 1.0% over the past year, and prices in San Diego are down 1.8 percent year-over-year.  On the other end of the spectrum, prices in Minneapolis are down 8.3 percent over the last year, and prices are down 8.4 percent in Phoenix over the last year.  So it is entirely possible that many people who utilized the tax buyer credit lost money, but it is by no means fait accompli as the article would suggest.

Nevertheless, the authors larger point that the home buyer tax credits were foolish use of tax payer funds that only temporarily buoyed home prices is in my opinion valid.  At the time of the credit, many analysts essentially made the same point.  Barry Ritholtz of the Big Lead frequently criticized the tax credit.  These criticisms have been borne out now that home prices are at or near a double dip (depending upon your home price index of choice).  We spent a whole lot of money (somewhere between $16-22 billion as of last September) to goose demand for homes, only to see prices collapse after the withdrawal of the credit.  Not only is this phenomenally stupid public policy, but it prolonged the bottoming of the housing market, something that needs to happen before the market can truly heal.

Zillow economists recently downgraded their outlook on the housing market, now saying prices will bottom out sometime in 2011.  Not all of this can be laid at the feet of the home buyer tax credits.  Regulatory miscues and policy missteps set up this situation.  Sky-high supply that is still growing due to foreclosures and moribund demand as the result of continued high unemployment ensures that home prices will continue to fall.  However, none of this excuses the tax credits, which were ill-conceived and just generally a bad idea.

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