New homebuyer tax credit proposal: impact on the housing market
Thursday, November 12, 2009
Until now, we've been predicting that home values will likely bottom in the second quarter of 2010. But the tax credit could change that substantially, for several reasons.
· Because of the extension to existing homeowners and the doubling of the salary limits for applicants, the new tax credits represent a substantial increase in the pool of eligible buyers, thus translating into more demand for housing.
· This increased demand due to the tax credits will soak up some of the foreclosures expected to flood the market in 2010. We still expect foreclosures to increase over the coming months before peaking next year, bringing more cheap inventory into the market.
· The spur in demand comes during the real estate markets slow winter season, so it may help even out seasonal declines in home sales, which were expected to translate into downward price pressure. Spring and summer 2009 proved good for home values, as they flattened substantially. But fall and winter, even in the best of times, normally bring sagging demand and, this year, it looked like Q4 was shaping up to be a really dismal period in the real estate market. Part of this was due to demand that was pulled forward into Q3 by buyers trying to take advantage of the tax credit that was originally set to expire Nov. 30. The expectation was that this weakened demand would translate into renewed declines in home values. The presence of the tax credits, which would expire at the end of June (for contracts completed by April), could bring increased demand to the market during this normally slow season. The tax credits could be costly. We looked at the possible impact of extending only the $8,000 first-time homebuyer tax credit for an additional 12 months, and determined the total cost of that would be $14.86 billion. We also determined that it would spur an incremental 334,000 sales (sales that would not have occurred without the credit; based on a survey, we found that four of five sales of homes to first-time homebuyers would occur regardless of the tax credit). The government is estimating that an extension will cost the government $10.8 billion in lost tax revenue.
Moreover, a large amount of this new demand attributable to the new tax credits will likely be borrowed from the future, which suggests we could pay for it later. And ultimately, these foreclosures will have to move through the system. That said, these policies can change the near-term trajectory of home prices, from one featuring further declines in home values, followed by a more robust recovery in prices to a trajectory featuring a stabilization of home values now, followed by a longer period of flat performance. Either way, we're quite likely to end up at the same price level in several years time, regardless of the path we take to get there. Read more of what Zillow's Chief Economist Stan Humphries has to say about the tax credit click here.
· Because of the extension to existing homeowners and the doubling of the salary limits for applicants, the new tax credits represent a substantial increase in the pool of eligible buyers, thus translating into more demand for housing.
· This increased demand due to the tax credits will soak up some of the foreclosures expected to flood the market in 2010. We still expect foreclosures to increase over the coming months before peaking next year, bringing more cheap inventory into the market.
· The spur in demand comes during the real estate markets slow winter season, so it may help even out seasonal declines in home sales, which were expected to translate into downward price pressure. Spring and summer 2009 proved good for home values, as they flattened substantially. But fall and winter, even in the best of times, normally bring sagging demand and, this year, it looked like Q4 was shaping up to be a really dismal period in the real estate market. Part of this was due to demand that was pulled forward into Q3 by buyers trying to take advantage of the tax credit that was originally set to expire Nov. 30. The expectation was that this weakened demand would translate into renewed declines in home values. The presence of the tax credits, which would expire at the end of June (for contracts completed by April), could bring increased demand to the market during this normally slow season. The tax credits could be costly. We looked at the possible impact of extending only the $8,000 first-time homebuyer tax credit for an additional 12 months, and determined the total cost of that would be $14.86 billion. We also determined that it would spur an incremental 334,000 sales (sales that would not have occurred without the credit; based on a survey, we found that four of five sales of homes to first-time homebuyers would occur regardless of the tax credit). The government is estimating that an extension will cost the government $10.8 billion in lost tax revenue.
Moreover, a large amount of this new demand attributable to the new tax credits will likely be borrowed from the future, which suggests we could pay for it later. And ultimately, these foreclosures will have to move through the system. That said, these policies can change the near-term trajectory of home prices, from one featuring further declines in home values, followed by a more robust recovery in prices to a trajectory featuring a stabilization of home values now, followed by a longer period of flat performance. Either way, we're quite likely to end up at the same price level in several years time, regardless of the path we take to get there. Read more of what Zillow's Chief Economist Stan Humphries has to say about the tax credit click here.
