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Tuesday, October 27, 2009

Home-Buyer Tax Credit and Unemployment

by Calculated Risk on 10/27/2009 01:53:00 PM

From the NY Times: The Case for More Stimulus. Excerpt:

... Washington is not providing a coherent plan for effective stimulus. The Senate has been hamstrung for nearly a month over the most basic relief-and-recovery boost: an extension of unemployment benefits. The Obama administration has called for an expensive crowd-pleaser of dubious effectiveness: sending every Social Security recipient an extra $250.
Other measures being floated are less effective than unemployment benefits and aid to states. Many of the $250 checks to Social Security beneficiaries will not be spent quickly, because many recipients have no pressing need for the extra money. Proposals by some lawmakers to extend and expand the $8,000 tax credit for first-time homebuyers are even less well targeted. Since it was enacted in February, only an estimated 15 percent of buyers who claimed the credit needed the money to make the purchase. It’s not stimulus when you pay people to do something they would have done anyway. It’s waste.
emphasis added
It is hard to understand why the next round of stimulus should include any extension of the home-buyer tax credit. It has a minimal impact on unemployment, it is poorly targeted, and as the NY Times notes "It's waste".

Meanwhile, the AP is reporting of potential "massive" teacher layoffs in Arizona, and Tom Abate at the San Francisco Chronicle reports the underemployment rate in California is 21.9%: Underemployed compound state's jobless troubles:
The state Employment Development Department estimates that this underemployment rate hit 21.9 percent in September.

That figure includes 1.9 million jobless Californians, 1.4 million people who had to work part time, and 865,000 adults loosely described as discouraged.

"Underemployment is at the highest level since we started keeping these records in 1994," said economist Sylvia Allegretto of the Institute for Research on Labor and Employment at UC Berkeley.
The best help for the housing market is reducing unemployment and thereby encouraging new household formation. New household formation is always low during a recession as people double up or move into their parent's basements. Once these people become confident in their employment prospects, they will be looking to move out of the basement - excluding of course Matthew McConaughey's character in "Failure to Launch".

Note: Reuters has more on the current status of the tax credit: Where's Home-Buyer Tax Credit Headed in the House, Senate?
Lawmakers in the Senate are debating whether to extend it, or even expand it, and a vote could come as early as Tuesday. The House, which would also need to approve the measure, has yet to act.