No need for another tax credit

Some markets will hardly notice absence of stimulus

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Jul. 30, 2010

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Some markets will hardly notice absence of stimulus

Steve Bergsman
Inman News

The federal homebuyer tax credit is fading away, and it won't be missed by all.

It looked good on paper: an $8,000 tax credit for first-time buyers and $6,500 for existing homeowners buying a new house.

And, the general consensus is the tax credit helped a lot of first-time buyers enter into homeownership, which a majority of folks still think is a good idea -- despite the destruction of the financial markets and encompassing recession that has forced millions into foreclosure.

So the stimulus did its job, but it couldn't last forever. And if the housing market at this point in the cycle can't push into the positive on its own momentum, there are serious structural problems in the homeownership business and another stimulus would only forestall a reckoning.

In addition, the tax credit literally skipped past a number of individual metros, leaving barely a footprint, so in those particular markets the exit of the tax credit will really not be noticed.

It's going to just take a few months to figure out where we stand, but most believe the housing market has been stabilized and will get stronger before the end of the year.

Before the tax credit headed into the sunset (contracts needed to be signed by April 30 and loans need to close by Sept. 30 -- the closing deadline was extended past the original June 30 expiration), there was a surge of buyers trying to wrap up sales before the contract deadline.

That's going to lead to a drop in sales over the summer months, and normal purchase levels should be reached again in September.

"We got a tremendous jump, both times, when it looked like the tax credits were ending, then there was a fall-off in pending sales," said Jed Smith, managing director of quantitative research at the National Association of Realtors.

According to the Wall Street Journal, the sales decline attributed to the contract deadline for the tax credits was more severe than expected, with some markets showing a drop-off of 25 percent to 30 percent.

In the past, that fall-off was short-lived -- two to three months at the most -- and Smith suspects there will be a pick-up in home sales in August. (According to his data, the fall-off began in May.)

Smith projects home transactions for 2010 will come in around 5.3 million sales, which is where the market has been trending for the last 12 months.

Those are national projections, which, when viewed in isolation, mask a number of anomalies in the tax credit program's implementation.

A few months back, when I interviewed Glenn Plantone -- a Las Vegas real estate investment adviser who founded the Real Estate Insider Club of Las Vegas -- about investor interest in Las Vegas' single-family home market, he alluded to the fact that the tax credit made little impact in his town for the simple reason that so much of the homebuying has been by third-parties (investors) paying cash.

Investors had little use for the tax credit because deals are driven by returns and cap rates.

"Last year, 50 percent of the home purchases were with cash and this year it's 34 percent," said Plantone. "The next largest percentage was by buyers putting down 20 percent or greater of the total cost. The number of buyers actually taking advantage of the tax credit might only be 5 percent to 15 percent."

He added, "last year I sold 14 homes to one buyer and 10 homes to another. I know other Realtors here that have sold 10-20 homes to just one person. That being said, I don't think the tax credit has had as big an effect in this local market as maybe some other markets."

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