Did Congressional wrangling over tax credit cause plunge in home resales?

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The National Association of Realtors (NAR) released their index of pending homes sales today, which shows a 7.7 percent slump -- almost double what economists expected. However, the news may appear worse than it actually is. During January and most of February, people held back from home purchase decisions waiting for Congress to make up its mind on a tax credit.

At one point on the Senate side, the proposed tax credit for home purchases was as high as $15,000 for anyone. Ultimately, the negotiated settlement was for an $8,000 tax credit for first-time buyers. But those shenanigans likely kept people on the sidelines waiting for the dust to settle.

Walter Molony, spokesman for the National Association of Realtors, told me in an interview he agreed with this conclusion. "We think that many people may have put contracts on hold waiting to see what the tax credit will be," he said.

Fact is, if you sign a contract before the start date for a tax credit, you will out of luck on using that tax credit. So who wants to risk that much money just to rush in and buy a house if they can wait a month or two and get $7,500 to $15,000 back in tax credits? Not many people are going to skip that much savings.

Molony does believe the bill that did pass will "encourage new buyers to get into the market, but that could take several months to show up in the index." He explained that most people take about six weeks to find a home and make an offer and then it could be as long as two months to close that sale.

The good news is that the NAR's affordability index jumped to 166.8 in January, which is the highest level since records began in 1970. As I wrote last week, we finally seem to be moving to a point where buying looks better than renting in some of the hardest hit markets. As markets shift to that position, we probably will see many people who have been sitting on the sidelines back in the market.

"Even with many serious potential home buyers on the sidelines waiting for passage of the stimulus bill, job losses and weak consumer confidence were a natural drag on home sales," Lawrence Yun, chief economist for NAR said in a statement. "We expect similarly soft home sales in the near term, but buyers are expected to respond to much improved affordability conditions and from the $8,000 first-time buyer tax credit."

Yun added, "Conditions have been aligning very favorably for home buyers with the exception of consumer confidence. But I am hopeful that sales will turn around by late spring and early summer because history suggests that home sales can rise even in times of job losses when housing affordability rises."

Lita Epstein has written more than 25 books including "The 250 Questions You Should Ask About Buying a Foreclosure."

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