Friday, April 2, 2010

Stimulus Needs Stimulating

Last year, when the first-time homebuyers incentive plan was introduced by the Federal government, there was a clear uptick in the number of buyers in the market. This year, the plan was reintroduced, along with a second incentive for existing homebuyers. It was obviously another, supposedly stronger, attempt to increase home sales.

Well, this time it doesn't seem to be working. Most brokers, including the one I spoke to this week in Phoenix, don't see the results. There could be more than one reason for this. First of all, most things like this--including big sales at stores--work better when people think that they are limited in time. If they think that deals will be offered again or extended, they are not as likely to move quickly. Secondly, it keeps getting harder for new buyers to get mortgages. This means that there may be buyers out there who want to buy, but who cannot qualify with the higher FICO scores now required. That last point is not necessarily a bad thing. If we can just stop and remember how we got into this mess, we will want banks to think twice before loaning to those who may not be able to repay.

I believe that there is also a fundamental flaw in the stimulus package, however. The government is trying to push demand from first-time buyers, who comprise the one group who will buy in almost any situation where they can. After all, they haven't bought homes at lower prices or with lower mortgage rates. They are generally buying because of changing life circumstances, and graduations, marriages, and babies happen regardless of the economy. Also, there are, in the end, only so many new households being formed. It might have made more sense to give the incentive to folks who didn't have the same motivation to move. After all, isn't it a little like giving a car price break only to teens?