C4C2

Cash For Clunkers II: Home Sales

Get ready to see a new crash in this 'recovering' market:

First-time homebuyers and investors are snapping up those homes and taking advantage of low mortgage rates. These buyers can also take advantage of a tax credit of 10 percent of the sales price, up to $8,000, if the sale is completed by the end of November.

The tax credit is so important to some buyers that they are adding a clause to their contracts, allowing them to back out if the sale doesn't close by Nov. 30. However, economists note that bargain-priced foreclosures and low mortgage rates are making a big contribution to the sales boom.

"We think the housing market has touched bottom and it is now only a matter of time until home prices stabilize — something that we anticipate to occur in late 2010," wrote Joseph LaVorgna, chief U.S. economist at Deutsche Bank.

Home sales are spiking because of the closing window for the tax credit, as the article rightly notes, not because the market has 'touched bottom.' If housing prices are likely to fall another 11%, but you can get a 10% tax credit (up to eight grand), you're very close to buying at the true bottom of the market. If they fall 20% more, you're buying near the bottom, but it's still possibly worth doing if you plan to hold the home for several years. If you were in the market for a first home anyway, this is the time to buy: December is too late, because your home effectively costs eight grand more.

What that means is that everyone who might buy a house in the next year is scrambling to do it now. Home sales will crater on 1 December 2009, and remain in the crater for the forseeable future. Just like auto sales following the end of "Cash for Clunkers," all this Federal money is just buying an artificial spike in the market -- it's not doing anything to spur real recovery, it's just making people who wanted to buy do it now instead of two months from now.

Of course, another thing spurring home buyers is the weakening dollar, and the administration's dangerously inflationary policy. If you have X dollars to buy a house and you do it now, you get X dollars worth of house, plus eight thousand dollars. If you wait two months, you get roughly X dollars worth of house. If you wait for the expected 11% drop in prices, however, you have to wonder if the inflation will kick in and make your X dollars worth only X-divided-by-something. Since the housing market may be near its bottom, getting out of 'cash' and into real estate might make some economic sense.