Another day, another tax credit extension proposal.
So the latest idea still includes an $8000 tax credit to 1st time buyers and a $6500 tax credit to repeat buyers that have owned their previous home 5+ years. While it doesn’t say it in the CNBC article, I have heard from other sources that the proposed extension would expire at the end of April but allow purchase agreements signed before that date to close up to the end of June.
While this is quite different than the proposal that was floating around just a few days ago, by expiring the program at the end of July and the lower amount offered to repeat buyers, it is still a more modest proposal than what several special interest groups were lobbying for until just recently. That proposal was so ludicrous and expensive that I was actually quite upset that NAR supported it with the MBA and NAHB.
If this bill is passed, I believe many of the following things will happen:
Some Closings will be Delayed
It may sound odd but if the tax credit extension takes effect December 1, many closings scheduled for November may be pushed out a few weeks to December so that the repeat buyer can take advantage of the tax credit too – $6500 can be a strong motivator.
House Prices will Continue to be Artificially Supported
We saw strong support levels for house prices in the 2nd half of this year – which is more likely due to the tax credit than the fundamentals of the market. We’ll continue to see the house prices artificially supported through the end of the tax credit extension. This does not mean that prices will instantly drop $8000 after the credit expiration, only that there will be some downward pressure on prices due to the normalization on demand and the lack of artificial incentives.
Tax Credit will Support Housing Through the Slow Winter Months
Historically the housing market is slower & sees price declines in the winter months as demand drops enough that prices drop to meet it. With the expanded credit in place, we are likely to see less seasonality in our sales prices and units sold over the winter months.
The 1st Time Buyers will be out in Lower Numbers than 2009
Many 1st time buyers that were planning to buy in 2010 bought early due to the tax credit, so some of that demand has been borrowed from the future and our borrowing from the future does have limits (pun intended).
More Houses in the Move-Up Buyer Category will Sell
Many buyers looking to make a move to a more expensive home will find the tax credit gives them a little more help to make that move or will give them the incentive to take the “loss” on their current home to make a “gain” on their new home. The fact that repeat buyers will excluded from the 2009 tax credit likely helped feed move-up buyers’ negative sentiments about the housing market.
Lower Inventory in the Under $150,000 Price Point will Limit Sales
Since the inventory of 1st time buyer homes has shrunk, some buyers who could not find homes to buy this year will have the same struggle next year. While more foreclosures are coming in 2010, the demand this year was so strong that inventory next year is still likely to be far more limited than it was last year at this time.
Inventory of Houses for Sale will Continue to Decline
Without increases in employment, wages and home prices, many Americans that might want to move still will not have the financial ability to do so and thus will still not list their house for sale – for many the $6,500 tax credit is simply not enough. As big as the foreclosure and short sale issue is, it still represents a very small percentage of all homes in the country.
Traditional Sellers will be able to Better Compete with Banks
Suddenly sellers that are planning to make a purchase of a new home after they sell their current one will find that they can give up a little more $ on the sell side due to the credit.
The $500,000+ Market will Still be Slow
With Jumbo mortgages still much harder, more restrictive, and more expensive to get than Conventional loans, these homes will see little help from the housing stimulus though the first timer’s move-up’s move-up may spend $500,000+ but they are just as likely to go more lateral than up by buying a home that is a better fit for their lifestyle versus bigger and more expensive.
That concludes today’s crystal ball forecast. If you have any thoughts on all of this, please comment below!
