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By Kevin Hassett
New home sales data have been gathered by the U.S. Census Bureau since the early 1960s. In May, they dropped to their lowest level in recorded history, increasing the risk of the dreaded double-dip recession.
The collapse coincided with the expiration of the federal tax credit for homebuyers in late April that Keynesians told us would restore stability to housing markets. On July 2, President Barack Obama signed legislation that extends the period in which the credit can be claimed until September, and many Democrats are clamoring for the credit itself to be extended as well.
Many nonpartisan economists who have studied stimulus spending have generally concluded that it is counterproductive and destabilizing. The history of the homebuyers’ credit provides a case study that illustrates where that conclusion comes from.
It all began back in 2008, as the recession was just picking up steam. At that point, new home sales had dropped to a level of 500,000 a month, about half the rate of boom times. Congress decided that a tasty incentive to buy a house might help turn the tide.
The first-time homebuyer tax credit was created as part of the Housing and Economic Recovery Act of 2008, which was signed by President George W. Bush on July 30 of that year. It offered a credit of 10 percent of the sale price, or as much as $7,500, and applied to homes purchased between April 8, 2008, and July 1, 2009.