by Jerry O’Driscoll
The AP reports today that sales of existing homes plunged 27 percent, despite the lowest mortgage interest rates in history. How could this happen?
Part of the Obama stimulus package was a tax credit for homeowners who purchased homes within a stated time frame. The credit has now expired. Economic theory predicted the program would be a failure on its own terms and it was.
Housing is a durable good and the stimulus in effect was a one-time income transfer program. What does economics tell us that individuals do with transitory additions to income? They save most of it. Because of the way this particular program was structured, the saved in the form of a durable good, that is, housing. Continue reading