Fraud might be rampant in the program, but that didn’t stop the Senate from voting 85-2 in favor of extending the home buyer tax credit. Why is it that the Senate is so willing to extend this expensive program? Here’s an example from Savannah, GA as to how the credit is affecting the market:
The housing credit’s impact is particularly pronounced in the Savannah area.
The number of first-time buyers locally is unavailable, but pricing and loan trends indicate they could make up more than 40 percent of the market.
Homes priced under $200,000 have outsold those priced above that number by almost a 2-to-1 margin this year, with homes sold for $100,000 to $149,999 – "starter homes" – outpacing all others.
And almost half of the houses financed locally this year were done with loans backed by the Federal Housing Administration or the Veterans Administration, which cater to first-time buyers.
And how would allowing the credit to expire affect the market?
A drop in local building permit applications in September offered a glimpse of what a creditless future could look like. Permits tripled in Chatham County during the summer months as builders began construction on homes that could be completed in time to be bought and occupied ahead of the Nov. 30 tax credit deadline.
Permit numbers dropped drastically in August and September, a trend the head of the local homebuilders association, Matthew Young, said reflected the industry’s wait-and-see approach to the post-tax credit market.
"If they don’t extend" the credit, Young said, "they will wait and see what sales are like after that."
Here’s a great chart from Business Insider that shows how this credit has skewed the market in favor of first time homebuyers:
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So how critical is the home buyer tax credit?
There is no question that the tax credit has kept the housing market on life support, but it has done nothing to genuinely improve its condition. As the information from Savannah indicated, if the tax credit were to expire, it is likely that the market would fizzle once more. It has not provided some sort of "green shoot jumpstart". It might even discourage the market in the long run as buyers ask, "Well if it’s $8,000 now, what might it be later?" After all, they are already expanding the credit from first time buyers to the move-up crowd as well.
One of the big issues however is the ongoing weakness in the jumbo market, and a $6,500 credit is unlikely to do anything for that. While a $8,000 tax credit is significant if you are buying a $100,000 house, a $6,500 credit is not much of an incentive for purchasing a more expensive home. A weak economy, expensive financing and tighter lending is still keeping downward pressure on upper-end housing and a lid on starter home appreciation. Home prices remain out of line with fundamentals and until that changes the market will remain in the doldrums.
Long term the tax credit cannot keep the market going nor do much for the move-up market. The credit might be critical to politicians to give the appearance of "doing something", but anything that skews the market so badly can only serve to delay its recovery.
twist -
Doomers who have been following the under-construction AEI Subprime VI seminar will have perhaps noted that John Makin, commenting on this issue, just supplied the transcript’s Letters of Fire.
Igor is “saddened.”
twist….exactly what i’ve thought. this past summer i said “why would i buy now (if i were a first timer)if in a year or two the gov’t may more or less give me a home?” obviously, some people decided to jump in based on the credit, but i think most of the buyers bought because they felt that they were finally getting a fair price. you’re also right about the $6500 credit. i’m pretty sure if you’re patient, you could negotiate the price down by MUCH more than $6500 on a $500K home.
azsaluki: “but i think most of the buyers bought because they felt that they were finally getting a fair price”
Isn’t that exactly what the tax credit proves? If someone selling a home for $100,000 drops the price $8,000 (8%), they have more people willing to buy? So why not let the prices drop without using taxpayer cash to do it? Oh, right.. politicians have to look useful even though we all know they are not.
Igor is still ’saddened’. Might want to get him a depression counselor, he’s been this way awhile!
while the AVERAGE home in Phoenix might have gone up 10K in the last three months, in reality starter homes have gone up more like 40K. Many many people are paying a lot more for small homes than just a few months ago, and home flippers are making a killing with the help of this credit.
Meanwhile, anything in the valley over 300K has continued to decline, anything really expensive, or not FHA loanable (such as a ton of condos) is still in complete free fall.
I do not think this credit will have the same effect however; the supply of credit worthy (ok FHA credit worthy) buyers is simply not infinite, and most people who have owned for five years either won’t want another home, won’t be able to sell the current home, and/or are underwater. Land lording is a terrible risk right now, so buying a second home for the credit is a seriously flawed idea.
you’re right linenoise (and i agree they shoulda let the market fall naturally). but if i had the option to buy the same home for 92K, OR buy it for 100K and be given a check for 8K…..i’d choose the latter. it’s the same reason so many people that could’ve put a down payment towards their purchase chose to go with 100% financing….more cash in your pocket now.