On March 19, Utah Gov. Huntsman signed SB 260, authorizing 1600 "Home Run" grants to new home buyers. The state will pay a $6000 grant to those purchasing a new home. The grant is paid at closing, and is only applicable to newly-constructed, never-occupied homes. Total cost of the program is $10 million, paid out of Pres. Obama's federal stimulus package.
How will this help the economy? The idea is to encourage home buying while clearing the glut of new houses. Once the glut is clear, developers will start building again, thus employing all those out-of-work construction workers.
Some problems with this plan...
1. Whether or not the plan helps buyers is premised on the notion that a $6000 grant will lower home prices. How do we know that will happen? What's to stop sellers from raising their prices, and simply using the grant as a hollow sales incentive? Car manufacturers have been using "rebates" for years to the same effect: jack up the invoice price and offer a rebate to fool the suckers into thinking they're getting a good deal. The plan seems to have plenty of safeguards on the buyer side of the transaction, but hardly any on the seller side. It's plausible that the plan won't help buyers much at all.
2. Six thousand seems like a lot, but when it comes to home prices it's really not. First, it's paid at closing. I don't know if it can be used for down payment or closing costs. But even if it is, it won't reduce the monthly mortgage payments. That's the critical factor in home affordability, since income-to-debt ratio is the major risk component. You may have more money in your pocket after closing, but the bank's not going to care about that, and it won't affect your monthly payments one bit. This means the plan will do nothing to increase the number of buyers.
3. What it will do is shift buyers away from existing homes to new homes. While the $6000 grant won't affect monthly payments, it will reduce the overall cost of the mortgage. Given two otherwise equally attractive houses, the $6000 will invariably tilt the buyer towards the new home, leaving existing homeowners stuck.
4. The glut was caused by overleveraged builders who needed to keep building (and selling) to stay in business (see for example the Traverse Mountain, Suncrest, Daybreak, and Eagle Mountain developments). They ignored falling indicators and kept building, gambling that the economy would return to "normal". They lost, and got stuck with unsellable inventories.
5. Given the opportunity, they'll do it again. As smart as they may be, these are not wise people. Good businessmen don't waste millions planning an 8000 unit development without a fallback plan. These are not good businessmen.
The market is forcing these companies out of business. That's a good thing. As they go out of business, the empty homes and lots will be forced into auction, where they will be sold at cut-rate prices. Catch that? Prices on the oversupply will fall all by themselves, and the inventory will clear itself. At that point the only builders left standing will be the good businessmen. They'll be more than happy to provide whatever new homes are needed at that point.
Granted the oversupply will continue to exert a downward pressure on prices. But that's good, since the market as a whole has been irrationally overpriced for years, and needs a correction.
This plan attempts to prop up new home builders at the expense of existing home sellers. To sell their homes, existing homeowners will have to lower their list prices to compete with the subsidized new home prices. But few buyers will be savvy enough to see the difference--how can anyone, let alone a new buyer, truly determine the absolute price value of something as subjective as a house? Buyers will thus be lured away by the prospect of a $6000 check, and existing home sellers will be left on the market.
And yet the plan will ultimately fail at its primary objective. It will NOT stimulate new home construction. The foolish home builders are going out of business. $10 million in subsidies won't keep them afloat, and will instead be passed on to their creditors. The smart home builders, who have the wherewithal to survive, will raise their prices and pocket the difference, waiting for the recession to end before committing to new home construction.
It's clear to me that this plan is 100% corporate welfare. It's sponsor, State Sen. Scott Jenkins of Weber, lists on his official conflict of interest disclosure "Construction industry" [sic]. And according to the Salt Lake Tribune, it was Clark Ivory, CEO of the state's largest homebuilder, that originally suggested the plan.
Full disclosure: my home has been on the market since November. I've lowered the price once, and I'm considering lowering it again. With this new plan in place, I will almost certainly have to lower the price or risk being on the market for many more months.
