Don’t know if you’ve heard about it, but there’s this thing called a “first-time buyer tax credit” going around right now, as well as a “repeat buyer tax credit.” Apparently they’re pretty popular, at least with Realtors and marketing folks.
These will disappear at the end of next month (unless Congress re-ups them once again, that is), so if you’re looking for a home and want to get $6,500 or $8,000 credited back to you next spring, you need to have your ball rolling by now. With that in mind, the Wall Street Journal has offered a few facts, reminders, and tips to consider as April 30 approaches.
Over at the Chicago Jetty Blog (the latest addition to our Chicago Real Estate News sources), Grant offers the following thoughts on the credits and what we could see in the market following their expiration.
The first time homebuyer credit is not currently supporting housing sales from a supply/demand view even though it may be influencing buyer psychology. The $8k credit is currently baked into the price of real estate and if it expires we will see an immediately correction in home prices to the tune of $6k – $8k. We learn in economics that the only causative exogenous shocks are those that are unexpected. Just like every other indicator and metric, the size doesn’t matter in the short run but only whether we can accurately predict/expect the size. Unfortunately, the government only had the opportunity to shock to the positive side by announcing the first time home buyer credit unexpectedly, and now all they can do is remain neutral and extend the credit again. It’s as if the government had no credit exit strategy and we are now waiting for the shoe to drop. In other words, the effects of the credit has lived its life and is now harming organic price growth and buyer faith.
“We learn in economics that the only causative exogenous shocks are those that are unexpected.”
That is only true if the affected markets are perfectly competive (no market power by any buyer or seller) and all prices are perfectly and instantaneously flexible. The real estate market does not even roughly approximate this situation.
But even in such markets tax credits are not fully incorporated into prices because of the law of demand.
I don’t think prices are going to drop $6-8k for the following reason: Next spring is a long time away. Do buyers really factor in money they are not going to receive for an entire year into their purchase decision? This is just a mail-in-rebate on nuclear steroids. Most people are too impatient to wait 8-12 weeks for $50 let alone 52 weeks for $8k. I closed on my condo last July and claimed the tax credit this spring and can say that the credit played no part in negotiations.
you can amend your 09 tax return (or file it with your 09 tax return) even if you purchased in 2010- and get it in 12-16 weeks- but I agree with the overall point.
Fred,
Buyers can amend or delay filing their 2009 taxes and receive the money well before next year. Are you saying mail-in-rebates don’t influence people to buy things? I think the consumer goods and MIR industry would disagree with you on that. Plus, this rebate is guaranteed — the IRS isn’t going to deny you because you photocopied a UPC.
I will add that this was not THE deciding factor for me to buy- but the $8000 cash is not a small sum of money by my standards- it will make me not feel guilty to buy some new furniture! I also have a good number of friends who have recently signed contracts or are attempting to ASAP so they can get that money.
Two new points of thought: 1) if buyers are going to be able to say “you should come down on your price $8k because I can no longer claim the tax credit” once the credit ends, why aren’t sellers now saying “you should up your offer because you are going to be getting money back”? 2) While $8k itself is a lot of money, in terms of the whole real estate transaction, it really isn’t. If you can’t afford a $250k place, chances are you shouldn’t buy it for $242k either.
1) We don’t know if that is happening or not. Does a seller have to give a reason for providing a counter-offer? Also, prices are more likely to fall from lack of demand than the credit itself — buyers will either buy now, or not buy until prices look better. Until unemployment and the local economy improves, can you see any reason for an influx of buyers?
2) Good point, but $250k is a long term cost. That $8k short term can restore your emergency fund or buy furniture/paint for the place, hell it could even be used to pay most HOA fees for over a year.