Monday, September 21, 2009

Extend the First-Time Honebuyer Tax Credit

From Bloomberg:

The Obama administration is studying whether to let a first-time home buyers’ tax credit expire as scheduled at the end of November. Bernanke and his Fed colleagues may continue talking this week about how to wind down purchases of mortgage- backed securities, according to Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York. The two programs have helped stabilize real-estate demand, with new-house sales rising 9.6 percent in July from the prior month, the most since 2005.

Let's look at the economic data.

First, the economy has yet to print a positive GDP report in the last 4 quarters. While all the indicators tell us we're probably going to print one within the next few, we still need all the help we can get to keep the number positive. That means anything that encourages consumers to spend will help -- and the first-time home buyer credit is clearly helping.

Existing home sales have bottomed out. Notice the annual pace of sales has printed between 5.5 and 6 million over the last two years. However, this number needs help to continue its increase and deplete the large inventory overhang.

New home sales have bottomed at the beginning of this year. They've risen since then, but like existing home sales still need help.

As for the Fed's program stopping it probably won't kill the market.

Click for a larger image.

Above is a chart for the mortgage-backed bond market's ETF. Notice that even during the height of the housing crisis the market didn't crash. Also note that credit markets have settled down over the last year.

The A2P2 spread has come down to far more normal levels.

In other words, the credit markets are working far more normally right now so withdrawing the Fed's program shouldn't kill the revival. In addition, this would be a good time for the Fed to start testing its exit strategy.