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Are we Surprised? Part 2

This is a follow up from yesterday's comments about existing home sales dropping after expiration of the $8,000 bribe (I meant to say tax credit) to buy a home. Today the Associate Press reports that new homes sales have declined 33% after expiration of the tax credit (or did I mean to say bribe again?).

"Analysts were startled by the depth of the sales drop.” -http://finance.yahoo.com/news/Newhome-sales-plunge-33-pct-apf-1718773153.html?x=0&sec=topStories&pos=main&asset=&ccode=

Really? They were startled?

Again this is not a surprise at all. The credit brought in the marginal buyer and now that the credit is gone, those marginal buyers have become homeowners leaving a vacuum in marginal buyers. We went from a borrowing multiple of about 3.3 times pre-tax income before the housing boom to 9.2 times pre-tax income at the peak of the boom; an increase in the borrowing multiple of 2.8 times! That is one of the major causes of the bubble. The bottom line is that no amount of tax credits will bring back the same housing demand when the borrowing multiple was 9.2 times pre-tax income. It's just not going to happen.

So what will the Government do now that the housing market is already showing weakness? Are they going to expand the credit? Gee I hope not. Instead of more tax credits, the Government needs to get out of the way and let this real estate market do what it should naturally do after a major bubble and that is deflate. There is no other solution than deflation of housing prices.

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