First it was Cash For Clunkers, an Obama program that helped spur auto sales for a couple of months. But once the program ended, auto sales slumped and were even lower than before the program started, just as many economists (and a few non-economist bloggers, like yours truly) predicted. All the incentive program managed to do was shift the purchase of vehicles forward a couple of months, meaning that people that were inclined to buy new cars or trucks regardless of any program moved up their purchases a couple of months. But there were no follow on purchases meaning the sales plummeted once the program ended. There was no net gain of sales.
Now were seeing the same thing in the housing market, with a sales slump following the end of the tax breaks given for buying a new home, first for first time home buyers, and then for anyone buying a new home. Once the program ended in April, there were no follow on purchases. All the program managed to do was shift the sales forward a few months. There will be no net gain in sales. The folks buying homes would have done so anyway.
So the low mortgage interest rates have been driving a lot of refinancing, but not a lot of mortgages for the purchase of homes. Color me surprised. NOT. Even with the lower interest rates the demand isn't there, having been exhausted by the end of April due to the tax incentives.
And then came May, traditionally the height of the spring housing season.
Mortgage applications to purchase a home began to sink. Now, four weeks later, mortgage purchase applications are down nearly 40 percent from a month ago to their lowest level since April of 1997. Yes, you can argue that a larger-than normal share of buyers today are all cash, but those are largely investors.
That means real organic buyers are exiting in droves.
"With another week of historically low mortgage rates, the trend from the prior three weeks continued, as refinance applications increased while purchase applications dropped. Purchase applications are now almost 40 percent below their level four weeks ago, while the refinance share, at 74 percent, is at its highest level since December," said Michael Fratantoni, MBA's Vice President of Research and Economics.
How much have those incentives cost the American taxpayers? The obvious answer is more than if there had been no tax incentives at all, and it was all for nothing. The temporary bump in home sales has passed and the slump has taken its place.
Way to go Team Obama!