Car sales rocketed after the government rolled out their “Cash for Clunkers” sales incentive, but then plummeted when it expired.
New home sales rebounded after the government rolled out tax credits for new home purchases, but have already started to fall in the face of a program end.
As a plugged-in reader correctly notes:
Even builders of more upscale homes have felt the impact of the looming deadline. That’s because those move-up buyers will have trouble selling their homes without the incentive of the credit.
The only surprising thing about the decline, that it seems to have been “unexpected.”
∙ U.S. New-Home Sales Fall as Credit Nears Expiration [Bloomberg]
∙ Whether Or Not Credits Moved The SF Market, Phase Out Hits Home [SocketSite]
∙ Clunker hangover knocks sales down at Chrysler, Ford, GM [USA Today]
Both of the programs are examples of programs that move consumers to the left on the demand curve, as opposed to those that SHIFT the demand curve to the right.
In other words, we have simply borrowed demand from future quarters in order to supply the present. Economically this is good to stimulate growth, however we should certainly understand that it does noting to the underlying value of the products (a change in such underlying value would have shifted the demand curve to the right, setting new higher values of these goods at any point along the scale).
The net here is that the program will not have a significant effect on the value of real estate or cars. Wages do.
This is no surprise to an economist. The intertemporal substitution elasticity is the largest of all price elasticity. Translation: when a discount is expiring, people rush into the market to take advantage of it. You need look no further to understand the recent “surge” in sales/prices in most areas.
BTW – You could also argue the programs cause a temporary SHIFT in the SUPPLY curve to the left, setting a new, higher demand point intersection on the demand curve. Both examples however failed to SHIFT the demand curve…
I wouldn’t agree this was an example of intertemporal substitution, but I would agree to an economist, this is expected. 😉
I disagree with this statement:
when a discount is expiring, people rush into the market to take advantage of it.
I don’t disagree with the statement itself, but I disagree that this represented any sort of discount. What it represents is a subsidy, being given to the seller, not the buyer. When the program ends, the prices will fall.
Thus, it is stupid to “rush” to get this “discount”. All you will be doing is rushing to help the seller, not you, and if, in your rush, you make an suboptimal decision, then you really lose. Wait for the program to end, prices to fall, competition to disappear, and then make a much better deal.
These types of programs are only for people who failed economics.
You know what a bold Congress really needs to do?
Impose a steep, confiscatory tax on the income of all those Americans who dare rent.
Something akin to a sin tax.
I guess they’ve tried to do that with the mortgage interest deduction, but yes, maybe they need to steepen it up. Renters and savers are clearly destroying this country.
tipster, I understand the sentiment and agree with it (especially the observation that what the credit is/was is not a discount but a subsidy). You wrote:
… of course, if the program keeps getting extended, then you could be waiting for prices to fall for an indeterminate amount of time.
“Wait for the program to end, prices to fall, … and then make a much better deal. ”
That could also apply to the Fed’s quantitative easing and other Fed and Treasury programs to keep mortgage prices low. 7-8% jumbo rates would make prices drop in a hurry.