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The Post Tax Credit Housing Market (Part 2)

What will housing demand look like for the rest of 2010?

It has been an interesting six weeks since the last of the government programs for buyers, the Home Buyer Tax Credit, has expired. Demand has slowed down but has not come to the screeching halt some had expected. The million dollar question is ‘What will happen to demand as we continue through the rest of this year?’ We will attempt to answer that question today.

Demand should be broken down into three categories of homes for sale:

  • entry level homes: for first time home buyers
  • move-up homes: for the sellers of the homes that first time buyers purchase
  • upper end homes: the highest priced homes in the area. In some pricier marketplaces, the upper end homes will be luxury homes (selling for more than $1 million).

Each marketplace will have all three types. Let’s take a look at what will potentially happen in each category in the second half of 2010.

Demand for entry level homes:

There is no doubt that the Home Buyer Tax Credit increased sales in the first four months of this year. But, did it actually increase the number of people buying a home or did it just push demand forward. Many experts believe that buyers who planned on purchasing in the second half of the year moved up their plans to take advantage of the tax credit.

Business Week quoted Douglas Duncan, chief economist of Fannie Mae, the largest mortgage financier in an article last week:

“Temporary tax credits change behavior temporarily. It’s simply shifted demand forward.”

CNBC, in an article entitled Housing’s Double Dip, quoted Zillow.com:

“While temporary tax credits succeeded in lifting buyer psychology temporarily, they essentially shifted demand forward without having a lasting impact on prices or purchase behavior. We expect some payback in the form of decreasing sales after the final closing deadline at the end of June.”

This makes sense and we do believe that sales were pushed forward by the incentives offered.

CONCLUSION: There will be a lower demand for entry level houses until later this fall. Demand will then resemble what existed prior to the tax credit – IT WILL BE FLAT.

Demand for move-up homes:

This is a category we believe will remain strong throughout the summer. There seems to be a belief in some circles that the only houses selling are those that are distressed properties (foreclosures and short sales). These type of sales do not create a second buyer as the sellers leaving these homes cannot qualify for a new mortgage. Over 70% of the homes sold today are NOT in this category however. The rush of first time home buyers created a stream of move-up buyers that are currently looking for their next home. This group is somewhat hesitant to pull the trigger as they want to make sure the deal on their current home closes before the June 30, 2010 deadline.

There is now chatter that the government will extend the deadline past the June date (They are only talking about changing the deadline on the closing date. You will still have to be in contract by the end of April). If that in fact happens, it will relieve some of the concern of the first time seller and enable them to commit on their new home.

CONCLUSION: This category will remain strong for the next few months. Once the wave of closings created by the first time buyers slows, so will this category. We won’t see another increase in demand until very late this year or early next year.

Demand for upper end homes:

This category has stood alone from the rest of the housing market over the last 18 months. This market was immune to much of the government stimulus as even the artificial lowering of mortgage interest rates had virtually no impact on jumbo loan rates. This market was less affected by the tax credit and therefore will be less impacted by its expiration.

There is a building momentum of buyers ready to purchase as they sense fair values in the upper end markets are returning. The National Association of Realtors (NAR) in April reported on year-over-year percentage of sales increase by price point.  Their findings:

  • Houses sold between: $100-$250K – 28.6% increase in sales
  • Houses sold between: $250-$500K – 28% increase in sales
  • Houses sold between: $500-$750K – 31.1% increase in sales
  • Houses sold between: $750K-$1M – 44.9% increase in sales
  • Houses sold between: over $1M – 47.1% increase in sales

CONCLUSION: We believe, as confidence is re-established in housing and the overall economy and jumbo mortgage rates become more favorable, the upper end category, especially the luxury market, will continue to gain strength.

That covers our thoughts on demand. We still see houses selling this year at numbers that reflect a normal market. As Case Shiller said in their last report:

Now that the tax incentive ended on April 30th, we don’t expect to see a boost in relative demand.

What about prices? We’ll cover that tomorrow.

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