The federal government’s tax credit for home purchases ended last April. There was a sharp rise in home purchases ahead of its expiration. The housing market has moved down most months since then.  Data from the  Standard & Poor’s/ Case-Shiller Index shows the drop is still relentless.

The Administration launched a new homeowner aid program— the Home Affordable Modification Program — to aid those who faced mortgage foreclosures. HAMP, though, was a flop.  Less than half of the affected 3 million homeowners got the help they needed. The Treasury Department has fought efforts to repeal HAMP, but it seems its efforts are too little, too late.

The Administration and Congress have been unusually mute about a renewal of the homebuyer tax credits. It may be that in the age of austerity they do not want to dare voters with a new and expensive housing proposal. That thinking is short-sighted.

The damage done to the economy by the home price fiasco is incalculable but tremendous. Nearly one-quarter of all home mortgages are underwater. Case-Shiller Index co-creator Robert Shiller has predicted that home prices could drop another 15%. The devastation to the balance sheets of many Americans will cause a decline in consumer spending which could be nearly as bad as the one during the recession. People will also be more likely to abandon their homes either because they cannot afford their mortgages or refuse to honor them because they stand no chance of seeing a return on their investment.

Foreclosures drive down the home prices in the neighborhoods near the properties on which the mortgages have been foreclosed. Banks still have not put many of these homes on the market.  This “shadow inventory” of houses could be as high as 2 million. Banks will slowly begin to sell these homes, probably at steep discounts, to clear their balance sheets. The impact on the already depressed housing market will be obvious.

The only program that the federal government has had in place which has actually helped home sales was the tax credit. The erosion of home prices has destroyed much of the wealth of Americans and continues to do so. A tax credit, even if it raises the deficit substantially, may be the only foundation the housing market will have to rebuild itself after the disaster of the past few years.

Douglas A. McIntyre

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