Government’s Good Intentions: Inverted Incentives
October 21, 2009
The government has been offering first time home buyers and $8,000 incentive when they buy a home. On its face it seems like a good idea that might help the real estate market. But this $8,000 bonus is helping first time home buyers – i.e. people without a history of repayment or default – buy homes they might not be able to afford. This is very much like the sort of legislation that got us in this mess in the first place. Congress wanted ALL Americans to be able to afford the American dream and as a result pressured banks to make loans to people who simply couldn’t afford to repay them. Good intention, bad idea.
Wouldn’t it make sense to offer a n $8,000 incentive to anyone who hasn’t had any delinquencies on their existing mortgage for the past 48 months? The problem with the $8,000 first time home buyer incentive is that it creates demand for homes on the low end, but doesn’t help anyone currently in the low end upgrade to a better home. They might be able to sell their existing home, but they won’t get any help from the government to buy something newer or bigger. If we offered the incentive to anyone who has proven they can manage their finances well enough NOT to have had a delinquency we would free up existing homeowners to buy and sell homes unlocking equity that is tied up in houses all over the US.
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