Mark Zandi is anxious to give President Obama credit for the first time homebuyers tax credit, arguing that it helped stop the free fall in house prices. Actually, blame would be more appropriate. The credit was offered at a time when the bubble was still far from having fully deflated. The credit was not going to maintain house prices at a permanently inflated level unless the government was prepared to go the route of a house price support program. (This would be sort of like out farm price support programs, except it would be a lot more costly and would redistribute much more money upward.).

The main effect of the credit, as Zandi notes, was to pull people into the market earlier than would have otherwise been the case. As a result, many first-time homebuyers paid bubble inflated prices for houses. The price declines resumed as soon as the credit expired. When the deflation of the bubble had been completed many saw price declines on their homes that were two or three times the size of the credit. This loss was a totally predictable effect from offering the credit in a market where the bubble was still in the process of deflating.

The credit did not have any lasting effect on the housing market. It just transferred wealth from the government to homeowners wishing to sell and to banks and other mortgage holders who might otherwise have been forced to accept short sales. It is hard to see any positive effects from this policy.

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