Home Tax Credit Expiration to Lead to Second Housing Slump?
It's like the hangover after a wild party, leading to the usual question: Was it worth it?
First, we might still scrape a few more months of good news out of the homebuyer tax credit. The May and June reports for new and existing home sales should both stay high, as homebuyers who signed contracts back in April make it to the closing table. But expect those sales figures to drop soon after.
In early June, the Senate voted to give homebuyers who made the April 30 deadline to sign a contract a full five months, until September 30, to close the deal and claim the credit. Experts have been concerned that the current deadline to close, by June 30, wouldn't be enough time as banks struggle to handle the flood of loan applications. If the change becomes law, no hopeful homebuyers should be forced to break contracts because they can't arrange a mortgage and close the deal in time.
However, once these sales are finished demand for housing will drop. Experts now say that the tax credit motivated hundreds of thousands of people who would normally have bought homes later in the summer to hurry up and sign contracts this spring. That inflated the housing activity, creating a mini housing bubble that will deflate this summer.
Move these sales forward in time was the biggest effect of the tax credit, according to experts like Michael Fratantoni, vice president of research and economics for the Mortgage Bankers Association (MBA).
That's the same thing that happened last year, when demand for housing built up before an earlier deadline for a $7,500 homebuyer tax credit and collapsed in the months after the deadline. For example, existing home sale rose from a seasonally-adjusted annual rate of less than 5 million a year to nearly 6.5 million in November, only to fall to a little over 5 million in January and February, according to reports from the National Association of Realtors.
The good news is that an existing sales rate of more than 5 million is still an improvement. "Sales remained well above the levels exhibited in early 2009, boosted by an improving job market, rising confidence and continued low interest rates," said Frank Nothaft, chief economist for Freddie Mac.
After the dust settled, experts like MBA's Frantantoni say that between 100,000 and 300,000 people who wouldn't have bought homes at all in 2009, made purchases because of the tax credit. This year's tax credit should achieve a similar result, he said. So even at the low end of the estimates, Frantantoni believe that the two home buyer tax credits will take a net 200,000 unsold homes out of the inventory of homes for sale. On the upper end of the estimate, the tax credits helped sell more than half-a-million unsold homes.
Freddie Mac's Nothaft believes that this year's tax credit will also be a net win, once the fast spring and the slow summer are added together. "We project home sales up about 10 percent for the year, relative to 2009's annual volume," he said, crediting the increase to the tax credit, continued low interest rates, and a slowly healing national economy.
So was the tax credit worth it?
It's the same dilemma faced by any business that puts a product on sale - demand spikes up during the sale then falls back down after the sale is finished. The real benefit to the business is that the store has a chance to clear away some of its excess inventory.
Since an excess inventory of unsold, foreclosure houses is that dead weight holding down the housing markets, anything that cuts into that inventory is good news for housing.
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