• English
  • Español
AGENTS: Did you know you can share a personalized version of this post? Learn more!
,

No Tax Credit. How Will You Wind Up?

BUYER DEMAND

The big question in the real estate industry today is what happens now that the Homebuyer Tax Credit has expired. There are many theories around this issue. Some believe that the tax credit (along with other government programs) has created a stabilization in the housing market both in the number of sales and in the pricing of housing inventory.

Others believe that all the tax credit did was reward people who would have purchased a home anyway. This group believes that, at best, the program just moved up future demand by prompting those who were thinking of purchasing a home this year to do it before April 30.

I want to tackle the issue of demand (how many houses will sell now that the program has expired) in today’s blog.  And I will tackle the impact on pricing in tomorrow’s blog.

What impact did the Tax Credit have on demand?

There is no doubt that the program increased sales (as we can see in the charts seen below). The first is the National Association of Realtors (NAR) Pending Home Sales Index. NAR defines this index as follows:

The Pending Home Sales Index is a leading indicator for the housing sector, based on pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing … An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined as well as the first of five consecutive record years for existing-home sales.

We can see that pending contracts soared up until October 2009. A purchaser needed to close on the house prior to November 30, 2009. That is why demand dropped off in October because they wouldn’t have been able to meet the deadline unless they were already in contract in October. Looking at NAR’s Existing Home Sales Report, we can again see that demand surged all the way through November on closed sales.

Demand dropped off significantly in both categories after the tax credit was originally scheduled to expire even though there was a last minute announcement of an extension (and expansion) of the program. After a lull, there was another uptick in both graphs as the new extension approached its expiration. We will probably see headlines later this month reporting more good news as the pending contracts for March and April and the sales for April are reported.

Now what happens?

Will we see a dramatic drop off in demand the way we did last November? Or did the program re-energize the housing sector causing the purchasing momentum to continue? No one knows for sure.

The bad news is we didn’t get the same boost from the tax credit the second time around (see the graphs above). The good news is that even if demand drops it doesn’t have too far to fall.

And there is evidence that perhaps the absence of the credit will not have a major impact on the decision to purchase for those looking for a home throughout the rest of the year. Prudential Real Estate just released a survey which addressed this issue. In that survey, they asked people currently in the market to purchase a home what effect the expiration of the tax credit program will have on their decision to buy. Sixty five percent (65%) said it would have little or no effect. Here are the full results:

As we can see, the impact on demand might not be as severe as some are suggesting.

What does this mean to you?

If you are a buyer and see a home that makes sense to purchase, you probably should. Especially with rising mortgage rates looming as we move further into the year. If you are a seller, it looks as though the affect on demand won’t be that dramatic. What will be the impact on prices? We will cover that in tomorrow’s blog.

3 replies

Trackbacks & Pingbacks

  1. […] we must look at two variables: supply and demand. We covered buyer demand in yesterday’s blog, No Tax Credit.  How Will You Wind Up? We determined that demand for residential property could remain rather stable. The supply side of […]

  2. […]  Harney Article: No Tax Credit. How Will You Wind Up? […]

  3. […] we must look at two variables: supply and demand. We covered buyer demand in yesterday’s blog, No Tax Credit.  How Will You Wind Up? We determined that demand for residential property could remain rather stable. The supply side of […]

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *