First Time Home Buyer Stimulus

For the vast majority of American voters, the housing collapse of 2008 is a monumental example of government abuse and incompetence. Regardless of whom your political ideology leads you to blame, the fact remains that the housing bubble and collapse were the result of political maneuvering by both parties which had been building for more than twenty years. Making matters worse was the federal government's attempt to fix the housing crisis through its two first time home buyer stimulus packages.

What Are the Home Buyer Stimulus Packages?

These two stimulus packages were officially known as the Housing and Economic Recovery Act of 2008 and the American Recovery and Reinvestment Act of 2009. Both programs were designed to provide tax credits as incentives to encourage first time home buyers to enter the housing market. Surprisingly, these programs came on the heels of widely published reports indicating that reckless lending practices which provided mortgages to unqualified buyers was largely responsible for the housing collapse. Yet the federal government's solution was to encourage more unqualified buyers to purchase homes by offering them tax credits.

The first time home buyer stimulus plans were certainly a boon to those buyers who were able to purchase new homes. But as it turns out, their boon is a bust for the rest of us. These tax credit programs were first initiated in 2008, and between the two of them, extended through May 1, 2010. The housing market saw an artificial resurgence during that time as large numbers of first time home buyers entered the market.

The federal government claims that the programs were necessary to spur sales and help the market recover. At first glance it seems as though the programs were successful. But upon further review, the first time home buyer stimulus programs caused more damage to an already bad situation.

Foreclosures Hitting an All-Time High

According to an article published on DailyFinance.com in October, 2009, foreclosures in southern California were at an all time high. In addition, many mortgage lenders were hiding their foreclosed properties through accounting manipulation in the hope of reselling these homes when the market was stronger. The existence of these "shadow homes" were never counted as inventory available to the home buying public, thereby creating the perception that the supply of available houses was lower than it actually was. Anyone who knows anything about real estate knows that when demand is higher than supply, housing prices increase. One of the undeniable results of the government's two home buyer’s stimulus programs was an artificial inflation of home prices.

In addition, the federal government has artificially held interest rates at their lowest levels in history. This reckless strategy aimed at encouraging lenders to put money into the system cannot be continued endlessly. The effect of sustained low interest rates is that lenders do not make as much profit on loans as they need in order to meet the bottom line. Therefore, they are unwilling to lend; preferring to hold onto their cash and make their profits through other investments.

For those who believe the first time home buyer stimulus program helped the housing market, one only need look at current real estate prices to realize that these programs have simply caused further problems. Prices for existing homes continue to fall and it's estimated they could fall as much as an additional 11% into next year. According to Forbes.com, most experts believe we have not yet hit the bottom of the housing market, which begs the question, “How much worse can it get?”

One final note on the current housing crisis relating to Fannie Mae and Freddie Mac; these two federally-backed financial institutions bear the lion's share of blame for the housing collapse, because they encouraged and protected the reckless lending practices in the years leading up to the collapse. A government that is fiscally responsible would have responded by closing Freddie Mac and Fannie Mae the very day the housing collapse began. Instead, our irresponsible federal government has not only allowed these two institutions to continue operating, they have also provided further funding to keep them in business.

Fannie Mae and Freddie Mac continue to recklessly guarantee home loans for buyers who cannot afford to purchase. The two federal stimulus plans designed to get first time home buyers into houses is simply a repeat of the same mistakes made in the 1980s and 1990s. Unless these practices are corrected, we're headed for another housing collapse sometime in the near future.