Friday, July 31, 2009

Treasury Spends $90 Million to Create New Housing Inventory

The Treasury Department announced yesterday that it has allocated $90M from the American Recovery and Reinvestment Act towards affordable housing in several states. Based upon the details included in the press release, it appears that Treasury will be providing funding for stalled development projects located - in at least one instance - in a town of less than 5000 persons. This particular expenditure, directed towards a previously failed elderly housing development, will flow to the town of Osawatomie, Kansas.

To be clear, we do not have an issue with elderly persons being provided a place to live. Our contention arises from what appears to be the creation of new housing inventory by the federal government. For the housing market to recover, a very simple dynamic needs to emerge: housing starts must remain subdued for a period, and be accompanied by higher sales that are a function of depressed prices. We have already seen some positive data points emerge as of recent in terms of the rate of home sales; signaling that at least to some degree, prices have dropped sufficiently to spur new demand. This trend will be rendered useless by the creation of new inventory, which will serve to negate the positive inventory reductions associated with higher sales. Furthermore, Treasury's strategy is another example of inefficient government spending; it is directing funds towards projects that the free market has abandoned, for the purpose of achieving a political agenda. Although the roots of said agenda may be fastened to a moral purpose, the continuation of these policies will only serve to prolong the housing slump.

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