Yes it’s true, the first-time homebuyer tax credit and the “move-up” tax credit both expired on April 30, for all intents and purposes. Anyone who signed a sales contract before the end of last month still have two months to close, but if you’re a buyer, seller or agent who is sans contract, the next two months may have you twiddling your fingers nervously, waiting to see what the housing market does, and more importantly, what it does to your home search, your attempt to sell your home or your paycheck (respectively).
But to really understand what the tax credit did, and what it will do, you have to break down the numbers a bit, and of course, understand a bit of basic economics – supply and demand. Oh, and it also doesn’t hurt if some companies (cough Coldwell Banker Buyer Bonus cough) launch some novel programs with the intention of softening the landing after coming down from the rocketship ride that was the first-time homebuyer tax credit.
So first, lets look at the numbers and combine that with some high school knowledge of economics. Without the tax credits, many have speculated that every home has now dropped in value by $8,000, since that’s the amount many buyers were getting as a credit for buying a home. But this is not an accurate or realistic assumption to make for a variety of reasons:
1. First and most importantly, the tax credits came in the form of a giant lump sum of cash, not in the form of an $8,000 discount spread out over a 30-year mortgage. So conversely, it cannot be accurately said that reversing the tax credit is equal to an $8,000 boost in the price of the house, spread out over the life of a 30-year mortgage. We’re comparing apples to oranges. $8,000 cash right now is a HUGE incentive compared to knocking $8,000 off the total value of a house, which spread out over 30 years would only be about $25/month in terms of a mortgage payment. So when someone says making $8,000 in a lump sum cash payment is the exact opposite of spending $25/month over 30 years, that’s a logical fallacy. The fact is, even with the tax credit now vamoose, most homebuyers aren’t going to immediately assess the value of a home at $8,000 less than its current asking price. In reality, the tax credit and the value of the home are really almost entirely separate issues and should be addressed as such. A home’s value is still determined by what people will pay for it, not by some illusive government program that is more closely related to tax law than to the housing market.
2. Home values are constantly fluctuating, and within only a few weeks, an entire neighborhood could see its average sale price rise by much more than that $8,000 difference. If a new grade school is built or an existing school is remodeled just down the street from your home, odds are the price of your home could increase overnight by as much as $20,000, realistically. If a new shopping center is built within a mile of your home, the value will increase. If CNN Money writes an article about how your city is one of the best places to live in the country for any number of reasons, your home value will increase. Or you can simply spend a few hundred bucks and repaint the house or have the lawn professionally landscaped and you’ll probably add more than $8,000 to your home with only a modest financial investment. And most importantly, once the economic recovery returns us to a state of normalcy, home values will steadily appreciate in most cities no matter what happens, since the population is always growing and therefore demand is always growing.
3. Not everyone shopping for a home was shopping only because of the tax credits. Many people didn’t qualify anyway, and those people aren’t any more or less inclined to buy a house than they were a month ago. In fact they might be more interested to buy a home now, since the competition from first-time homebuyers is now going to decline. If this happens, demand will go up, which will again boost prices a bit and absorb some of the price impact suffered by losing the tax credits. And even if that doesn’t end up being the case, I return to point #1 and #2 … within even a month, any number of things could happen to completely erase any loss of value a home suffered upon the tax credits expiration.
4. And now for the best lesson of all…economics 101, supply and demand. Basically, economics tells us that supply and demand always result in a balance, even if it takes a little while to achieve that balance. When the tax credits expired, it was kind of like a person jumping off the side of a small boat, with the kid being the tax credit and the boat being the housing market. Sure, the boat is going to rock back and forth a few times, but within a very short time, it will be stable again and back to a balanced level in the water. The housing market will behave no differently now that the tax credits have jumped overboard. At first, home values will drop slightly because demand dropped. But, once prices drop a bit, that will raise demand and slow the drop in prices, which combined with the recovering economy, should all but eliminate any damage done to your home value by the expiration of the tax credits.
So, if you’re an agent or home seller, fear not! The worst case scenario might mean a small ding in the selling price of a home, which you can mediate yourself with a small home improvement, or you can just wait it out and let the economy self-correct. But the most important thing to remember here is that most buyers recognize the tax credit was a proactive action of the government and not a reflection of the home’s value, and therefore sellers should not expect offers to all of the sudden drop by $8,000 just because the tax credits are gone. In fact, I’d be surprised if home values dropped much at all, and by the time May is finished – should the economy continue to grow slowly as it did in March and April – the economic factors driving a home’s value upward will more than balance out any drop in value suffered by the departure of the free tax money.
CBTG Homes 