New Homebuyer Tax Credit Proposal: Impact on the Housing Market
By: Stan Humphries, Chief Economist | November 5, 2009
On a 403-12 vote today, the House of Representatives approved a measure to extend the $8,000 first-time homebuyer tax credit, along with a $6,500 tax credit for repeat homebuyers who have lived in their current homes for at least five years. The Senate has already approved the bill, and the President is expected to sign it tomorrow. To qualify for the credits, applicants must sign a purchase agreement by April 30, 2010 and close by June 30, 2010 and have annual incomes below $125,000 (for individuals) and $250,000 (for joint filers). Income limits were previously $75,000 for individuals and $150,000 for joint filers. In addition, the home being purchased must be for the applicant’s primary residence (i.e., no vacation homes or investment properties) and priced at no more than $800,000.
Until now, we’ve been predicting that home values will likely bottom in the second quarter of 2010. But the tax credit could change that substantially, for several reasons.
- Because of the extension to existing homeowners and the doubling of the salary limits for applicants, the new tax credits represent a substantial increase in the pool of eligible buyers, thus translating into more demand for housing.
- This increased demand due to the tax credits will soak up some of the foreclosures expected to flood the market in 2010. We still expect foreclosures to increase over the coming months before peaking next year, bringing more cheap inventory into the market.
- The spur in demand comes during the real estate market’s slow winter season, so it may help even out seasonal declines in home sales, which were expected to translate into downward price pressure. Spring and summer 2009 proved good for home values, as they flattened substantially. But fall and winter, even in the best of times, normally bring sagging demand and, this year, it looked like Q4 was shaping up to be a really dismal period in the real estate market. Part of this was due to demand that was pulled forward into Q3 by buyers trying to take advantage of the tax credit that was originally set to expire Nov. 30. The expectation was that this weakened demand would translate into renewed declines in home values. The presence of the tax credits, however, which would expire at the end of June (for contracts completed by April) could bring increased demand to the market during this normally slow season.
The tax credits, however, could be costly. We looked at the possible impact of extending only the $8,000 first-time homebuyer tax credit for an additional 12 months, and determined the total cost of that would be $14.86 billion. We also determined that it would spur an incremental 334,000 sales (sales that would not have occurred without the credit; based on a survey, we found that four of five sales of homes to first-time homebuyers would occur regardless of the tax credit). The government is estimating that an extension will cost the government $10.8 billion in lost tax revenue.
Moreover, a large amount of this new demand attributable to the new tax credits will likely be borrowed from the future, which suggests we could pay for it later. And ultimately, these foreclosures will have to move through the system. That said, these policies can change the near-term trajectory of home prices, from one featuring further declines in home values, followed by a more robust recovery in prices to a trajectory featuring a stabilization of home values now, followed by a longer period of flat performance. Either way, we’re quite likely to end up at the same price level in several years time, regardless of the path we take to get there.
Finally, don’t forget that the extension of the tax credit to existing homeowners brings not just demand into the market, but also an equal amount of supply (i.e., they have to sell their home in order to buy another). The existing tax credit to first-time home buyers was pure demand. Every buyer that was spurred to enter the market helped push inventory levels down by increasing demand relative to supply. With the existing homeowner tax credit, current homeowners are trading homes between themselves. What will be interesting to see is whether this game of musical chairs unfolds in an orderly fashion (i.e., some homeowners buying a new home before selling theirs; others doing the opposite) or whether skittishness about the market will lead more homeowners to try to sell their home first before buying a new one. The latter scenario could lead to more near-term supply than demand, which will push inventory up and prices down.
Regardless of where one nets out on the particular merits of the tax credit, what’s becoming even clearer is the tremendous importance of stemming the tide of foreclosures. Compare the estimated 300K+ incremental home sales the $8,000 tax credit could bring about next year with the almost three million homes that are estimated to be somewhere in the foreclosure pipeline. It’s like draining your bathtub with a spoon while leaving the faucet running. Loan modifications are clearly not making a dent in the problem and we’ll never be able to buy enough demand to compensate for all the foreclosures.
This leaves policies targeted at income support and job creation which can help keep people in their homes in the first place. Compared to the $10B price tag for the housing tax credits, the $2.4B Congress spent yesterday to extend unemployment benefits looks like a bargain and ideas are starting to circulate now about how to get more credit flowing to small businesses so they can start hiring now that the economy is officially growing again.
- Stumble it!
- Categories: 8000 tax credit, Real Estate Analytics
Comments
10 Comments so far
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Jason on November 6, 2009 7:07 am
You make some good points but I think your insight about inventory levels increasing and prices decreasing could be a book in itself. I would compare it to using software to predict storm paths like hurricanes, they are so many variables that it would take years of theory development to draw any viable conclusions. Whenever you add a human element to an equation, get ready to be stymied.
I am in the Raleigh, NC sales market and our growth has taught me one important fact: New construction will win 95% of the time when in direct competition with re-sale properties. I feel that people here who put their homes on the market for no other reason than just because they want to take advantage of the tax credit will not have a major impact on prices. We will likely see what could be a marginal increase in 2010 stay relatively flat. Even when our market was moving at a faster pace, that was common because our volume of new construction homes has kept re-sale prices in check. Only pocket areas really saw bloated appreciation.
My prediction for Raleigh: Prices stay flat through winter with small, incremental increases through 2010. An outstanding year to buy in our market for individuals that will live in their home at least 3-5 years.
(Part of my thinking stems from forecasts of 3.5% growth/year through 2025).
Jason on November 6, 2009 7:44 am
One more piece to add: Builders (in the Raleigh market) are adjusting their pricing through the margins they charge and the type of inventory they build. New homes are cheaper now and will continue that way for the next few years.
DebtFree on November 6, 2009 12:49 pm
RE: “Raleigh: Prices stay flat through winter with small, incremental increases through 2010″
Jason, how many of those Raleigh / Research Triangle Park jobs are being shipped to India?
With local jobs leaving, out-of-staters unable to buy in Raleigh (since they’re underwater on their primary residence), and a glut of new construction at every turn, how can Raleigh area housing prices not decline?
DebtFree on November 6, 2009 1:06 pm
Stan,
In coastal metro areas (New York, Los Angeles, etc) housing prices remain priced in the stratosphere while incomes have remained flat for a decade. An $8K tax credit in an environment where a tiny 3 bedroom Cape Cod costs $600,000 and up, is absolutely meaningless.
We have entered a “New Normal” where we manufacture nothing (see: GM, Chrysler), where we send our best jobs overseas (see: India, soon Shanghai), and where we can no longer live an illusion of prosperity created by borrowing equity against over-priced housing and easy credit (debt).
Housing prices from 2005 were an anomaly — fueled by lending practices, and lenders, that no longer exist. Having house prices move towards 2005 is not a “Housing Recovery,” it’s a misguided attempt to keep a mania-driven real estate bubble inflated. Having house prices decline by 30 to 40% is a Housing CORRECTION, where incomes can actually support the payments.
Copy-and-paste URL to see housing price chart:
graphics.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif
Greg on November 6, 2009 3:42 pm
Early in 2009 I was laid off as the home builder I worked for folded. In August of 2009 I sold my existing home which I had owned and lived in since 2001 and bought a new one as a result of a job relocation.
My reading to the actual bill (which besides being incredibly painful) was that I would be able to take advantage of the $6,500 tax credit.
Do you know if this is true?
Thanks!
foreclosures on November 8, 2009 10:46 am
Every buyer I talk to is happy about the tax credit; it’s been a motivating incentive for buyers here in Las Vegas. As far as the national deficit goes, maybe we need to do a better job of accounting for the ~2.5+ trillion dollars of taxes we collect every year?
Stan Humphries on November 9, 2009 4:49 pm
@Jason: As you say, Raleigh is a market that never really participated in the all-night bender that many of the big coastal markets did during the middle part of this decade. See its historical pattern compared to the US:
http://tinyurl.com/ycpqdkj
Foreclosures also appear to be substantially less of a problem there than in other parts of the country:
http://tinyurl.com/ybowbfm
Regarding RTP jobs being shipped off-shore (@DebtFree), current employment forecasts look pretty healthy for Raleigh.
http://www.economy.com/home/products/snapshot/us/metro.aspx?g=MRAL&src=medc-ppmetro
Given the current trajectory of home values there, relatively low foreclosure activity (compared to other markets), good employment outlook and lots of new demand via the tax credit, I’d agree that a continuation of stabilization across the winter months appears likelier in that market.
@DebtFree on the Case-Shiller graphic. Remember that the graphic is showing inflation-adjusted housing appreciation and we’ve already seen a 31% decline in their index since its peak. Also, once adding inflation back into the picture, there are a couple different ways you can get back to the same pre-bubble price levels if you believe that’s the correct way to price that class of assets: 1) more declines in home values near-term; or 2) an extended period of time of very low nominal price appreciation (which translates into depreciation in real terms).
@Greg: See the link below for another response I gave this AM about eligibility of current purchases for the tax credit. In short, my reading of the guidelines indicate that existing homeowners must close between November 6, 2009 and April 30, 2010 (or by June 30, 2010, provided a binding sales contract was in force by April 30, 2010).
http://www.zillow.com/advice-thread/Increased-income-limit-for-8000-first-time-credit-becomes-effective-immediately-or-Dec-1st/295963/
steve on November 9, 2009 8:51 pm
Bulldoze the REO’s.
DebtFree on November 10, 2009 3:46 pm
Stan, according to that chart Raleigh home prices jumped from $140,000 in 2000 to $210,000 in 2007 which is quite a bump. I looked at homes there in 2007 at about the $500,000 range and on the same street three years earlier homes had sold for $250,000. It was clear “yankees” from up North were coming down there en masse to overpay for houses, pricing locals out of their own market.
While employment there may look fine on the surface, a job at McDonalds and a job at IBM are both “1 job” but clearly different. High paying jobs to support the overpriced housing in the area (as the parabolic line in your chart indicates) are going offshore.
Regarding the Shiller chart, my hunch is people are in such deep financial trouble (I saw them running towards financial suicide with glee as they outbid us by $50K to $75K on houses) that they’ll be unable to hang on to their homes to wait for inflation to catch up. Forced sales will create new lower comps, add in declining incomes, high-paying US jobs shipped overseas, rising unemployment, and not a single industry or technology innovation (e.g., the DotCom boom) on the horizon to save us.
We, as a nation, are in deep trouble.
DebtFree on November 10, 2009 3:47 pm
By the way, Stan, thanks for participating here! Great stuff.