The Possible Impact (and Real Cost) of Extending the First-Time Homebuyer Tax Credit
By: Stan Humphries, Chief Economist | September 23, 2009
Today we announced the results of a recent survey, which Zillow conducted with Harris Interactive, asking prospective first time homebuyers how an extension of the $8,000 tax credit would influence their decision to buy a home next year. If the credit were extended, of those who intend to buy a home, 18 percent called the credit the “primary influence” in their decision, 25 percent said it would be a “significant influence,” and 27 percent said the credit would have “some” influence on any home buying decision. Thirty-one percent said it would have no influence at all on their decision to purchase.
According to our further analysis, this suggests that the extended tax credit could, at minimum, stimulate an additional 334,000 home sales compared to what we would otherwise expect to see during the period between December 2009 and November 2010. That could spell the difference between a 5% annual increase in homes sales over the period assuming an extension of the tax credit, versus a 2% annual decline in homes sales without the tax credit. With no extension, there’s a good likelihood that home sales this January will dip below their January 2009 level (257,000 home sales in the month). This seems likely given that January 2010 home sales would be hit both by the loss of incremental home sales that would have been stimulated by the tax credit, as well as by the loss of sales that were pushed up to September or October 2009 (i.e., people who would have normally bought in January buying in September instead in order to avail themselves of the tax credit).
Of course, to get those 334,000 incremental home sales next year, we’ll have to give the tax credit to an estimated 1.86 million first-time home buyers, creating a net cost to the government of $14.86 billion for the extension. This gives one some sense of the magnitude of the leakage of the tax benefit to those that would have taken the desired action (buying a home) even without a government incentive. For every five homeowners who get the tax credit, four of them would have bought the home anyway. In essence, this means that the government will have to pay roughly $44,000 per home in order to obtain 334,000 more home sales than would have occurred without the tax credit.
Creating demand seems like a worthwhile endeavor, even if it’s temporary or simply shifts future demand closer to the present. Marginal demand is likely needed much more in the short-term to get the engine running again than it is long-term when the engine will be running on its own accord (i.e., the eventual bottom in home prices and decreasing unemployment will be large demand boosts). The trouble is, it’s quite possible the upside pressure created by this marginal demand is likely to be completely overwhelmed by the downside pressure created by the massive numbers of foreclosures we’ll see as the foreclosure rates increase on their way to a peak next year.
What’s your perspective on the pros and cons of extending the tax credit?
Note: The full methodology of the survey and the analysis is available here.
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- Categories: 8000 tax credit, Real Estate Analytics
Comments
28 Comments so far
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John McClung on September 24, 2009 7:34 am
The methodology appears fine the conclusions seem to be VERY conservative. Actually working with buyers would show that there are some that look at he tax credit as a windfall and want to take advantage of the gift.
However there are those who would like to buy that are thinking they would buy but without the extra stimulus of the credit won’t. These are your 25% that respond with “significant influence,” and some of your 27 percent that said the credit would have “some” influence.
Even if it only gets half of the “significant influence” group and a fourth of the “some” influence group you have almost 700,000 buyers would be created by the tax credit.
Al Lorenz on September 24, 2009 10:20 am
I don’t want my kids paying for somebody’s home purchase. If Realtors really want this short term stimulus, Realtors should pay for it. It is EASY to want a benefit you think someone else is paying for. It is the root cause of the meltdown and our current problems. Just because this might, and probably will happen, doesn’t make it right.
Since the NAR is lobbying so hard for this, I propose NAR members should pay for it, not the taxpayers. See how hard they lobby for it when they are looking at a 14.86 billion dollar bill. I don’t think you’d find the NAR thinking it makes so much sense if they were paying for it.
DebtFree on September 24, 2009 10:26 am
It’s time the government stopped meddling in the marketplace.
If an “owner” can’t make mortgage payments, they should hand the keys to the bank and instead rent housing. All this talk of “keeping people in their homes” is ludicrous.
Many people assessed the housing bubble in 2005 / 2006 and decided NOT to obtain a toxic mortgage (ARM, 0% down, interest only, NegAm, etc) or overpay for a house. Today reckless consumers who foolishly signed up for these toxic loans, or who foolishly overpaid since “real estate only goes up,” are being rewarded by the government.
This “tax credit” is yet another misguided instrument of government intervention to keep home prices inflated at unsustainable levels. An $8,000 credit is such a tiny percentage of a home’s price, especially when homes are dropping in value 15-20% in the last 12 months alone.
One who doesn’t have savings (who else would be swayed by the tiny sum of $8,000?) should not be purchasing a house, especially as home prices remain very close to bubble highs.
Let the housing correction unfold, unabated, so that home prices can correct to levels where INCOME (not credit, not fancy financing, not tax rebates, etc) can support home prices.
Nick Taylor on September 24, 2009 10:37 am
An extension of the first time home-buyer tax credit is critical to a recovery of the housing sector.
This tax credit is no different than the funding received by the automotive and banking industries, albiet the automotive industry did have to refund a partial amount of their stimulus money.
With the reality of a growing shadow housing inventory http://twurl.nl/gka5ub threatening greater depreciation of home values, the real estate industry needs an incentive to help motivate new home buyers to boost the industry. In addition, this credit trickles up the price scale as new buyers allow entry level home owners to sell their home and move into a higher priced listing.
While I am just as concerned about the volume of debt we as tax payers will be accountable for over the next 5 to 10 decades, I am more concerned at the prospect of our current condition further deteriorating the housing industry and postponing the benefits of homeownership for the massive Gen Y generation (note: these are the next baby boomers and supporters of our economic vitality!).
DebtFree on September 24, 2009 11:58 am
Nick, when you say “recovery of the housing sector” what you are in fact saying is “return home prices to bubble highs.”
Do you really think pricing at 2005 levels was healthy, sustainable, and sane? Copy and paste to see below housing price chart:
graphics.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif
We are experiencing a “recovery” as prices decline — a return to home prices where people can actually afford the payments.
MiamiCondoShop on September 24, 2009 12:06 pm
The housing sector recovery is all “smoke and mirrors”. The tax credit is one big part of it and without government intervention we would all be worse off today. Fannie and Freddie own 100,000 REO properties and the foreclosure pipeline is only growing. Perhaps the government shouldn’t intervene and let home prices head lower where they should be, but I think that is too bitter of a pill for most Americans to take.
Gainesville Real Estate on September 24, 2009 12:42 pm
I heard this figure earlier today on CNBC. I don’t know whether or not the credit should be extended or expanded. Sure, I’m a Realtor and it’ll be great for business - but I have a problem with the government spending money on anything and everything.
Plus it really stings when I hear the loans to GM and Chrysler were $30b+, but all it took to restart the industry was $3b in coupons. Rediculous.
Hadley on September 24, 2009 2:21 pm
This tax incentive does not only have a positive benefit to Realtors and homebuyers - as Al suggests. I work for a condo developer in the Triangle area of NC - where we did not see a huge bubble and thus have not seen huge depreciation. We have many condos in the low $100k’s that are purchased by teachers, policemen, single-incomes, etc. They have savings (re: DebtFree), which they use some of as a down payment. Their $8000 from the government was spent buying new furniture, clearing off a credit card, taking a vacation - in other words, it went back into the economy. I can’t think of any industry that does not benefit from that.
Now I cannot vouch for other areas of the country, but here, even if you have high credit, low debt:income, and decent wages, it’s still hard as hell to get a mortgage. I can only assume that you naysayers have not applied for one lately. People have to have large amounts to put down, which depletes their savings. For many, the impetus to purchase the house is knowing that their savings will be reimbursed with the tax credit. When I bought my first house way back when (2004) I only needed 5% down. I would have thought the stimulus was overkill at that point also. But times have changed. And we are looking at pretty responsible buyers these days. Hell, most of them are scared out of their pants - of real estate agents, lenders, everyone.
DebtFree on September 24, 2009 2:42 pm
Hadley, Research Triangle didn’t “did not see a huge bubble”?
When I was there in 2007 looking to buy, the homes we viewed were $475 to $500K. In the same communities 3-4 years earlier, the same exact homes were selling for $250K to $300K.
A 100% price increase in a few years is most certainly a bubble. The level of building in that area was absurd, fueled in large part by folks up North extracting “equity” to purchase second homes, retirement homes, or anticipating a permanent move South to the Triangle area.
In other words, home prices were not supported by the local economy (read: INCOMES) but rather “equity” from out-of-staters.
We have considerable savings, and can “afford” to buy virtually anywhere, but refuse to pay bubble prices, and will wait until prices correct another 30%, or simply not buy at all.
Fireballsocal on September 24, 2009 6:35 pm
I am on the fence, waiting to purchase my first home. I am hoping the tax credit is withdrawn and prices dropped that much further. I have a hunch that without that $8,000 push, many new buyers will not have the savings/credit score/debt to income ratio to buy and that will leave less competition for houses, dropping prices. The $8,000 credit would have been only a windfall for me, not a necessity.
Doug on September 24, 2009 6:49 pm
STOP SPENDING MY KID’S MONEY!!! This year our government will spend $31K per person and only take in $17K in revenue. Why do our kids have to pay for our mistakes? It is so unbelievably irresponsible for us to keep borrowing money that our kids are going to have to pay back.
The market problems were caused by us - we need to let the prices fall back to normal levels and everyone now should have to suffer - we should suffer now not later.
Loan Modification on September 25, 2009 8:15 am
Interesting analysis, thanks
sfvrealestate on September 25, 2009 10:04 am
Most buyers that I work with here in California are unaware that there are restrictions on income for this credit. The amount of the credit is also dependent on the purchase price. Right now, I think low interest rates are more helpful than the tax credit.
abe vigoda on September 25, 2009 10:21 am
DebtFree is correct as usual. When the government subsidizes anything, it ends up costing more for all of us. There is no government money, it comes from my taxes. Doesn’t it disturb people that this $8,000 credit has made house more costly by an average of $44,000 or FIVE TIMES THE CREDIT?
In layman’s terms, these buyers over paid by $44,000 than if the house was bought without the credit. Only one out of five would have not bought the home.
WHY are we catering to 20% of the market and driving the prices up for everyone?
michael e mruphy on September 25, 2009 11:49 am
im a relator and i dont want to see the tax credit extended. the net effect of not extending the credit will be for buyers now looking to buy now, because of the dead line. most buyers are waiting to buy and will keep looking . If we adhear to the dead line of nov 30 that alone will help short term sales reduce the inventory since the buyers will have to buy or not get the credit . if the goverment extends the credit after nov 30 all the buyers will do is to keep looking and not buy. with the dead line the urgency will be there to buy.
David Lam on September 25, 2009 7:54 pm
I think the $8,000 tax credit is great not only for the realtors and builders and it benefits the consumers and the over-all economy greatly. The stand-alone $8,000 tax credit might not have a hugh
effect on the purchase of new or existing homes but
when you combined the state and local incentives for
down payment assistances for low and moderate income
families, the incentives greatly enhanced. In Houston, Texas, City of Houston is offering several
down payment assistance prgram ranges from $19,500
to $35,000 for certain targeted neighorhoods and
low income families. Many American families have
began to see a huge incentives to own rather rent.
In recent months, most lenders- Conventional, FHA
or VA, demand to see a minimum of FICO 620 to qualify
for a loan, for those selected few who exceed these
lending requirements, $8,000 will be great to help
them for closing costs,buy some furnitures, remodel
their homes or consolidated their debts. Most Americans are going through tough times and any incentives from Federal, State or local governments
will benefits these American families immersely.
US Government is printing money to pay for her national debts and government programs, given away
$8,000 for those who qualified and those who are
smart enough to take advantages of these government
free-money is a win-win situation for the US government and American people. Some had calculated
the extension of $8,000 for the qualified families
might required $4 trillion dollars or more of government spending etc., so be it. It doesn’t matter
the government printing press is print out $4 trillion dollars or 14 trillion dollars, the printing
cost is only slighly higher but the average American
will captured the real benefits, the builders will be
able to unload unsold homes, the general contractors
will have bread in their tables, the building suppliers will have recurring buyers for their products and OBAMA administration will score higher
in their report card for stimulating the economy, FNMA and FRE could unload their unsold forclosured
homes, mortgage brokers and lenders could be busy
again on approval loans for those qualified, our
college kids will again found some job opening at
one of those financial institutions, the $8,000 is
really great incentives and we hope the Congress
not only will exend the $8,000 tax credit, I would
personally see an increase to $15,000 tax credit next year. Only then, our US economy will resume
its vitality in its global leadership and prosperity.
Zillow.com predicts the impact of ectending the $8000 tax credit for home buyers | FlatFeePro.com on September 27, 2009 7:11 am
[...] Read the entire story on Zillow’s blog… [...]
1st Tyme Buyer on September 27, 2009 8:27 am
I personally would like to see the credit if not increased at the least extended.We help out large companies bail out of financial burden.Why not help first time home buyers.It is a win-win situation not only would it help out the buyers it will also help the real estate market.
ANGELICA COBIAN on September 27, 2009 9:24 am
I would not like to see the $8000 tax credit extension. I want to buy a home. I dont qualify for this credit because, Im not a first time home buyer. Maybe I’ll have better luck if less people are trying to buy homes because of this insentive.
sekena on September 27, 2009 10:22 am
I would like for the $8000tax credit to be extended. I myself would like to buy a home,and I believe its a great opportunity for others to help with there dream of buying a home.
billy on September 27, 2009 3:32 pm
I would like to see the $8000.00 extended.I am a first time homebuyer.I WOULD LIKE TO PAY OFF SOME CREDIT CARD BILLS WITH THE EXTRA CASH.And to the person who said that the people who want the extra money probally don’t have that much saved, you are a lie.Why not give fist time home buyers a stimulus? THE GOVERNMENT GAVE IT TO EVERYONE ELSE.
David Lam on September 27, 2009 4:43 pm
In good times, $8,000 might not seem to be a great deal of money for some of those more affluent American families. However, in real bad economy now, it is a life saver for some who desperately need it.
Whether it used for closing costs, buy some furnitures and consolidated your credit card debts, it is a great relieve for those who really need it.
US Government had been given away tons of money to
the big corporations or financial institutions but
the small guys never been able to see a dime. If the
US government had been given away an average of
$15,000 to every American families, the economy will
be booming like the Post Second World War. American
would sent more money to consolidated their debts
buy a second homes or buy more furnitures, cars and
used it for daily necessities. Why not help the mostly needy Americans or simply helping a few
AIG executives or throw tons of money to big spenders like the GM ?? Let the US government print
more money to help the needy and the averaged Americans. God Bless America !!!!!
Veronica on October 1, 2009 7:09 am
Please extend it! I am a first time homebuyer and desperately want to buy a home. I have been looking for months and cannot find one that suits me,(right school, right town etc.) It’s hard and I feel I am being rushed to buy.
With an extension, I can take my time and make a better decision knowing that I will be happy with my purchase and not feel like ‘I had to buy the house I didn’t want.’
I hope Congressman Chet Edwards is reading this so he will know how important it is to work on extending this for local families.
Good day to all.
IMHO_Ethan on October 7, 2009 7:33 pm
The $8k should go away. Why, because it is causing Sellers to be afraid that if they can’t sell their home when the $8k goes away to reduce their prices of homes. This only hurts the economy. Causing a false housing report of home prices declining while the units of homes sold increases. What does the $8k mean to me as a first time home buyer? Nothing. I will hopefully be closing on our first home on Nov.10th and can tell you that I would have bought regardless of the incentive. Why should my son, our children pay for the bail out. (Side bar: Why weren’t we the American People allowed to vote on whether or not we should have bailed out the Auto Industry and provide these housing incentives. Damn those lobbyists) What should happen is that tighter appraisel rules that are standardized across the nation should be developed. This would prevent the banks from creating fancy Loan Products to allow people to purchase homes with inflated home prices. Better underwriting policies should be created to scrutinize, but not punish people, in the qualifying of a Mortgage. I think that a much better incentive speaking as a first time home buyer, would be to allow for a FHA Loan product with .5% down instead of 3.5% down. I am sure there are alot of people out there that could pay the mortgage but don’t have the Down Payment to qualify. I use myself as an example, my rent is $300 more than what my mortgage will be and the only reason I can afford the down payment is because of a Sign On Bonus and Performance Bonus received from my employer in the last two years. So even though I can pay the Mortgage I would not have been able to qualify if it were not for these Bonuses. So what would the $8k do for me? Nothing. Now if a Incentive reduced my Down Payment to something more manageable I may have been able to purchase a home two or three years ago. (Granted probably note because of the over inflated housing prices.) There would be no cost to the taxpayer if a) the buyer could qualify with the tighter underwriting rules, b) the home’s value is not over inflated to allow for a Loan amount to be approved based on improved Appraisel Rules, and c) If the prospective buyers could at least show that they have some money down or have at least two months of Mortgage payments (Including taxes and fees) available. (Reminiscent of qualifying to rent an apt., First, Second and Last Month’s rent due at Lease signing.) I think that this would get more of the renters into the buyers group. Again using myself as an example, I can’t logically use any future income as a basis of making a purchase. Will it be nice to get the $8k, yes. Will the $8k go into the economy, most likely only a 1/3 of it will. (To purchase new appliances for the home.) The rest will go into my Savings account. Will other people / Have other people used the $8k to stimulate the economy? Probably not all of them or all of it. I use the Gov’s own findings of when they provided the Stimulus checks. More than half of the people who received the checks cashed them and placed the money into savings or their IRA accounts. So how did that help the economy? All I see it doing is creating a larger and larger National Debt that we leave behind for our children. What kind of legacy is that? We need to start focusing on increasing our Gross Domestic Product that can be exported to other countries.
David Lam on October 7, 2009 8:19 pm
I disagreed with Mr.Ethan. He suggested a .5% downpayment for FHA is insane. I believe 3.5% down payment or 5% down payment is healthy. I love the
$8,000 credit from IRS. It personally help my family
a lot. Without those funds, I would not have money
for my new born baby boy. I was not on welfare, medicaid or any government programs. For those who
think the $8,000 credit would hurt our future generations with more debts. Those ideas are not
healthy because regardless of the $8,000 credit for
first home buyers or not. The government is printing
and spending money in astronomical speed. Sooner or
later the US government will goes bankrupt and the
US dollar will become trash. Why not given some of
these “near trash” to the needy American now ? Instead of wait until it become 100% trash. The future generations will going back to the Stone Ages with great proverty in the entire Lands, not counting
drought and famine ….
calark69 on October 12, 2009 1:11 pm
America was built on free enterprise. Make or break. The fact that we gave billions of dollars to the automobile industry litteraly makes me sick!!Billions of dollars to corporate automobile moguls who will probably stay in the failure status anyway. If our government would have took the money that went to the auto industry to begin with and helped like they are trying to help now with the tax credit I think we would ( in the long run) have been better off.Giving hard working American families the opportunity to own homes seems a whole lot better to me then bailing out the automobile manufacturers. Businesses come and go. They die out. When GM or any other goes out of business ,another will soon emerge. You take a chance when you go into business and nothing lasts forever!!! If you fail, you move on.
calark69 on October 12, 2009 1:20 pm
I got a little off track . In closing I wanted to say that I think that the tax credit for first time homebuyers is one of the most applaudible things that our gov. has done recently. I AM for the extension.
steve on October 28, 2009 4:08 pm
I am trying to buy my first home as i am typing. this credit is garbage. we forget that the government has no money!!!!! we are creating more and more debt with progrms like these. I am a young adult and with these programs being approved my future generations are getting screwed. I am still angry about the fact that my grand chldren are going to be paying for all the morons out there that traded in there “clunkers”.
Bottom line is the government is giving away money they do not have, so we get higher taxes and oh yeah the value of the dollar drops farther.
Think about these things people. If someone wants to give you free money, it is probably too good to be true.