Home Buyer Tax Credit - Extend or Not To Extend Part #3

The way I see it there are three possibilities with regards to the home buyer tax credits; two are neutral or positive and one not neutral or negative in terms of impact to the real estate market.

First, there is the possibility that the home buyer tax credit motivated undecided home buyers off the sidelines who would have already purchased in a normalized market. The fact these buyers have been moved from inaction to action means that demand has been generated where there was none. These home buyers being moved off the sidelines into the real estate market can be part of creating a positive real estate environment for which other home buyers are motivated to move off the sidelines too.

Second, there is the possibility that people are going about their normal daily lives and just taking advantage of the tax credits that are available. Young adults graduate college, get married, have babies and buy houses. People are transferred to different locations. People situations change and cause the need for housing changes. All of this is a natural occurrence in the American culture regardless of the economy. These home buyers coming into the market would indicate that the home buyer tax credit did not generate any new demand, but did not necessarily hurt the real estate market either.

Third, there is the possibility that the home buyer tax credits have pulled in future home buyer demand to the present. This is problematic because it means that once the tax credits go away, we will see a drop off in activity. The past loose credit and lending practices and low mortgage rates had the affect of pulling future home buyers into the present (at that time) and is in part the reason for the real estate downturn. Everyone who wanted a house had one and even many people who should not have been in a house found themselves owning one.

The problem with free markets being manipulated by the government is it has unintended consequences. Those consequences can be negative or positive. If the news of housing prices moving up, listings being sold and real estate activity is normalized creates confidence and induces other home buyers into the real estate market that is a good thing. Conversely, if the government intervention creates a "bubble" of sorts that bursts when the intervention stops, then the unintended consequence could be far worse than had the intervention not occurred. The main question is, where are we now?