We’ve seen the headlines in the paper – the government is spending more that it’s making, but one area where federal taxpayer dollars have been effectively utilized is that first-time homebuyer tax credit. Economists will tell you that the key to any future sustainable economic recovery lies in home values stabilizing or, better yet, a return to a historical home price appreciation rate of 3 to 5 percent each year. The housing bubble burst and the excess values have been removed, the trouble actually lies in the fact that home values probably dropped far more than they should have! The good news is that the monthly mortgage payment for a middle income person buying a middle priced home is well below its historical norm.
A review of the latest data strongly suggests that the homebuyer tax credit has had its intended impact of significantly stimulating home sales. From about 4.5 million annualized home sales pace in the few months prior to the stimulus, sales have jumped to 5.1 million in recent months. That is a change of 600,000 additional existing-home sales. New home sales have risen from the mid 300,000 to low 400,000 range over the similar period. The rise in sales has been concentrated in the lower-priced home segment largely because first-time buyers are looking to stay, rightly, well within their budget.
Housing inventories are starting to return to normal and this will help in boosting prices. The median existing-home price as of August was down 12.5 percent compared to a nearly 20 percent decline early in the year. In short, sales have risen and home prices are stabilizing.
But the housing stimulus package is set to expire. To take advantage of this credit the sale needs to close before the deadline. Purchase orders written but not closed will not qualify. Some first-time buyers who are signing contracts to buy in October just may make the deadline. Ideally we would like to see this buying momentum continue so inventory falls back down to the normal 5 to 7 months, a level consistent with home value stabilization. Once that is accomplished, the consumer “fear factor” of waiting and waiting for a lower price later will no longer be part of the home buying decision. We will have reached a point of housing market self-sustainability. Consumer confidence will be lifted. The wealth impact of consumers opening up wallets for general consumer goods will steadily turn positive. Thus, the broader economy also gets set for a sustainable recovery without needing further stimulus dollars.
For that happy scenario to play out, a time extension on the home buyer tax credit is critically needed. At a cost of about $10 billion (if extended through the middle of next year), the housing market will likely have recovered nicely with the broader economy on track for a solid robust expansion. That $10 billion price tag is rather modest compared to the $700 billion in TARP funding and $800 billion of the broader economic stimulus package that was passed early in the year (with debate still raging over the effectiveness of that broad spending bill). Moreover, the cost of $10 billion is a static measure that does not take into account job creations and increased tax revenue from rising economic activity. Actually, if we take into consideration all of the economic dynamic responses, the homebuyer tax credit can be argued as a net positive revenue generator for the federal government.
A faster and firmer recovery can happen if the tax credit is opened up to more buyers by making it apply to any buyers – not just first-timers – and by raising the income limit for qualification. It would also contribute to healthy economic activity – a sustained recovery – and thus help to put a dent in the deficit. In short – it’s a win/win. NAR is working hard to get that homebuyer tax credit extended. You can help – by calling, writing or e-mailing your Congressional representatives. It’s good for home buyers and it’s good for the U.S. economy. Home purchases drive purchases in all areas of the economy!
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