Congress agreed to pour an additional $2,000,000,000 into the cash credit toward an overpriced new car for clunkers program this week, with various pundits praising the program as a rousing success. Meanwhile, industry professionals point to the $8,000 tax credit for first-time homebuyers as a major factor behind the recent increase in home sales.
One thing you don’t hear many people talking about with these “successful” programs is where are all these buyers coming from?
The people buying cars and houses because of these programs are almost certainly not individuals that were previously not in the market for a new house or car to begin with. Neither the $8,000 first-time homebuyer tax credit nor the $3,500-$4,500 would make any sense as a strictly financial proposition for someone who was not previously interested in buying.
As we have discussed on these pages before, an $8,000 credit is barely over 2% of the price of the median King County home. The chance that comparable homes will be more than 2% cheaper next year is extremely high at this point, meaning it is a better value proposition for the first-time buyer to wait for prices to fall on their own much more than the piddly $8,000 of your money the government is offering to give back to you.
As far as $4,500 toward a new car goes, most people buying into this program would probably save far more money by either buying a 2 or 3-year-old car or simply keeping their so-called “clunker.” This is especially true in light of the reports of widespread dealer mark-ups of cars since this program began, in amounts that are suspiciously close to the “CARS” rebate amount (e.g. – a car that was being offered for $20,000 three weeks ago now has a sticker price of $24,500).
So if they’re not being pulled completely off the sidelines into the new car and new home markets by these tax giveaways, where are the people taking advantage of these programs coming from?
My theory: All the government is succeeding in doing with these programs is to borrow even more demand from the future.
This is exactly what caused real estate demand (i.e. sales) to spike so high during the heyday of the real estate bubble: low interest rates and lending with fog-a-mirror standards drew buyers out of the woodwork—buyers that otherwise would have waited a few years until they were in a better financial position to take on the responsibility of a massive mortgage.
The same thing happened with demand for cars. People were withdrawing equity from their homes at never-before-seen levels and spending it on cars, TVs, and vacations. Dealers were offering 0% here and no-payments-for-36-months there, driving people who would have otherwise made do with their perfectly good car to trade it in for a brand new ride that they didn’t really need.
Today’s sagging demand for houses and cars is merely the demand debt from the boom years being paid back. Of course, debt repayment is never enjoyable, and big daddy government seems hell-bent on doing whatever it takes to prevent individuals, corporations, and the government itself from having to feel the inevitable pain.
So what do we do? We create nonsense tax credit programs to borrow even more demand from the future, compacting thousands of sales that would have taken place spread out over the next year or two into just a couple of weeks or months.
Does anyone truly believe that this path is sustainable, or are our politicians merely attempting to delay the real fallout of this mess until they have secured their own personal fortunes and pushed through their pet projects and agendas?
We cannot keep borrowing demand (or money) from the future forever. Eventually the bill comes due.
RE: Jonness @ 99 –
Some person or entity owns the housing units, even if they are rentals.
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By David Losh @ 101:
Yes, but the claim made in the article is that the homeowner rate is currently well above historical norms and will slowly adjust back to a normal level. IOW, this adjustment will temper the legitimate new demand in the marketplace as we continue forward. (I’m keeping in mind the homeownership rate is based on how many people living in households own their homes).
All the people who bought homes using lax credit standards and cheap loans drove the homeownership rate above sustainable levels. So far the rate has adjusted a couple of percentage points back toward sustainable levels. I believe the rate will continue to slowly adjust downward. IOW, new demand will be offset by a downward adjustment in the homeownership rate.
For instance, young couple A gets good jobs after college and secures a loan to buy a starter home. Migrant worker couple B goes to the bank to secure a loan and is turned down. Net affect, the homeownership rate cannot remain at the current 67%. Instead, it goes to 63-64%.
So in closing, yes someone owns the current homes in the U.S. But will these homes turn out to have been good investments?
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I haven’t read all the latest comments here, but here’s a list of the most popular cars bought and traded in using CFC.
http://blog.seattlepi.com/transportation/archives/175784.asp
Why would people be trading in 4×4 F150s for higher mileage vehicles? I can see the SUVs, because they’re basically substitutes for cars.
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When investors and renters are involved in bidding wars to buy the available property, the price goes up. When only the investors can secure a loan to buy the property (or they pay for it with cash), the price remains at a more appropriate level.
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RE: Jonness @ 102 –
A migrant worker may be a better home owner than a young couple with a new baby. It’s hard to say.
What’s for sure is that the price of housing units needs to be unwound. My fear is that large entities will end up with the millions of housing units out there and use them as rentals. For me it’s going to be a quality of life issue.
As an example here in Seattle on the corner of 85th and Aurora there are what look like hundreds of town houses. The area has always had a reputation for drugs and prostitution. As home prices decline I can’t picture what will happen to that area. It used to be duplex rentals now converted to owner occupied town houses.
You can already see that some of those units converting back to rentals has diminished the livability of the owner occupied units. There are no home owner associations to keep up the common areas.
Rather than focus on the negative aspects I think that home ownership is a good thing, for who ever wants that. I think that house prices and mortgage payments should be neck and neck with rental pricing. Owning a home should be a personal choice rather than something rich people do.
The conclusion that I have come to is to stop using banks and start paying off properties. If properties get to cash pricing I think the playing field could be leveled. If deals are between individuals who save cash or do owner financing it takes the financial engineering out of the equation.
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By Kary L. Krismer @ 103:
Well like me, many people have a “dump truck” that I take to goto the dump, and to haul around materials.
If I am buying a new vehicle and can get $4500 for my old POS truck that is worth $2k or less, sign me up.
I’ll rent a truck if I need one /w the extra $2500 I got.
now, I am not participatiting in CFC because I have other newer vehicles but if I was in the market, my pickup would be my clunker.
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RE: Racket @ 106 – I have a 4×4 truck that’s worth less than $2,000, and I wouldn’t consider doing this. My truck isn’t a POS, however. And when it does get replace, it will be with another 4×4, although perhaps not a truck.
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RE: Kary L. Krismer @ 103 –
It’s interesting to note that all of the top 10 trade-ins are American nameplates. Six of the top 10 vehicles purchased are foreign nameplates.
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I think Racket is right with his theory that alot of families have a beater pick-up that is used very occasionally to go to the dump, get a load of bark, haul grandma’s furniture to her new residence, etc.. An older pick-up easily fits the CARS trade-in criteria, so if I really wanted to access the $4,500 “free money” to buy a new car, the beater pick-up parked discreetly behind the house is a perfect candidate, which brings up another point. If a significant number of CARS Program trade-ins are rarely used vehicles, the program is less effective in getting “clunkers” off the road than it appears to be, because those “clunkers” really weren’t on the road all that much in the first place.
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In these times of health care debate it would be interresting to know how much traffic accidents costs in terms of health care each year and how much can be saved by putting people in safer cars via the cash for clunkers program by increased accident avoidance and reductions in accident severity. Could be a lot. And that’s just money, the fact that lifes and health can be saved is far more important than cost alone.
Regarding a course in physics for drivers it could be a good idea but I think a mandatory course like the ones we have in my country of origin where you have to drive on a very slippery surface induced by plenty of water and be able to handle critical siutations by breaking and steering is more effiicent. Many do not know howto efficiently handle abs and other electronic help systems. The art to control and cancel slides is also severly lacking. Just bring a group of people out on a go cart track and you will be shocked to see the lack of driving skills on the limits and in critical situations. Typically people who has grown up driving on snow and ice is far more skilled drivers.
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RE: jon @ 94 –
Opposition to health insurance reform is just one of many reasons why only 20% of Americans identify as Republican anymore.
Take your scare tactics and shove them.
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RE: jon @ 94 –
Now that really is hot air. A couple of old rich white guys sit around talking about the quality of health care. What a hoot. Is every one covered in England? Are we saying that the United States government is the same as the government in England? The english guy starts out by talking about how great our Constitution is then says our government won’t come up with the greatest Universal Health Care system in the world?
UnAmerican talk and chatter, or how our government will be working against the People of the United States is a right of free speech. It’s unAmerican, the people on Fox News seem to be completely anti America. They hate the President and wish him ill, they hate our system of Democracy, it seems they want to elect a regime that will be one sided. I’m not sure but I think that’s facism, the one where military might and police powers enforce the will of the government? Is that the democracy that elected Hitler?
If we don’t like it we vote.
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GM has been re-branding Toyotas as Chevys, Pontiacs and Geos since the mid 80′s.
The GM variants had similar reliability, but shared GM’s lower resale value. Some of the best used car bargains were the Geo Prisms (corollas) that could be had for a few grand less than the one marked “Toyota”.
Vibe is the same story. I had one of the 2.4 liter versions as a rental a few weeks ago. Not a bad compact wagon at all – We fit 4 people plus luggage in that sucker. I may consider picking up one 2-3 years used when it comes time to replace our 98 Accord.
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RE: TJ_98370 @ 108 – Just like you, I’m guessing that is a small amount as people that like those trucks, like myself, will be keeping them. If not, how will grandma move her furniture?
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RE: mikal @ 113 – Yeah, it’s an unwritten rule. Owner’s of old pick-ups have to help move grandma. That’s just the way it is.
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RE: Mike2 @ 112 –
Years ago I had the Chevy Nova, which in the late 80′s was a rebranded Corolla, and was the predecessor to the Prizm. Great car!
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Bravo!, Tim! Slowly but surely more people are catching on to the idea that we’re in a hole, and all of the proposed solutions somehow involve digging faster and deeper. And they know it can’t work. You can never borrow your way out of debt.
The arguments and justifications offered by those who don’t quite yet understand the entirety of the situation would be amusing if I, like a growing number of people, didn’t already know the ending is a tragedy.
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I don’t think anyone out there is trying to push the idea that C4C is about the environment. Everyone knows it’s for the auto industry.
The popularity on the Hill is interesting. Congress is pleased to have found a bailout that is fairly large scale and popular. Most of their attempts to push money from (future) taxpayers into businesses and the economy have been very poorly received. How much of the 700B stimulus money feels accessible to the average person? The appearance of that stimulus is a bunch of graft and waste a little trickle down benefit – not so appealing.
I think we can look forward to more like this. Meaning, more methods of laundering money through consumers’ hands to the bailout recipients. The $8k home tax credit could yet see some more life.
Someone on this thread remarked that this is good, countercyclical government policy. The problem is turning them off when the cycle turns. They become expectations and entitlements in no time. A budget surplus was good evidence of a high cycle, and what did we do? Tax cuts and heightened deficit spending. Fail.
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RE: Herman @ 117 – Not we, George Bush and the republican congress.
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RE: Markor @ 87 –
I’ve got a friend who buys Toyota, but bought a 2008 Chevy Cobalt….he complained about the electrical power steering making an electrical motor noise [BTW, I couldn't even hear it]…LOL
When I opened the hood and told him his two month old 2007 Toyota Yaris’ radiator tank was way low [by at least 2 quarts] and leaking….he slammed the hood down and all but told me to go to Hades…LOL
He now complains about brake noise on his Cobalt….I offerred to buy it from him and then he shut up…LOL
He doesn’t want to go back to under powered Toyotas but won’t admit it…LOL
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