Are We Headed For A New Real Estate Decline?

The federal government’s tax credit for first-time homebuyers is now over and done, a program that largely ended April 30. The result is that a housing market that had begun to stabilize will now be set back as demand wanes, meaning that prices will soften. For buyers and investors the good news is that there will be less competition for short sales and foreclosures.
The tax credit was worth as much as $8,000 for first-time buyers who purchased before April 30, 2010, however members of the military serving overseas were given until April 30, 2011 to qualify. In addition, there was a provision giving a $6,500 credit to home sellers.

“The credit for first-time home purchasers was a can’t-miss buying incentive,” says Jim Saccacio, Chairman and CEO at, the leading website for foreclosure properties and data. “The government was essentially handing out checks for $8,000. Most people would have to earn $10,000 to $12,000 before taxes to actually put $8,000 in the bank, so it was a big deal.”
The purpose of the credit was to increase demand and thereby slash unsold real estate inventories. Only when inventories are reduced is it possible for home values in local markets to start rising. Reports from the National Association of Realtors show significant price stabilization since the 2009 credit program began: In the fourth quarter of 2009 prices rose in 67 metropolitan statistical areas. A year earlier, only 18 metro areas showed gains.

In terms of pricing, NAR says in the last quarter of 2009 that median home prices reached $172,900 — down 4.1 percent from a year earlier. However, the 2008 figure was 12.4 percent lower than 2007. In other words, the downward price spiral was at least slowing. Given that the country was on the brink of depression two years ago, that’s not a bad result.

First-Time Buyers
The credit is important because in a typical year about 40 percent of the marketplace is represented by first-time purchasers. Take one first-time buyer out of the marketplace and you get a multiplier effect: the first timer doesn’t purchase so an existing homeowner can’t sell. The owner who can’t sell now can’t buy a replacement property so another sale is lost. The people who would have sold to the existing owner can’t market their property. And so on.
Trillion-Dollar Benefit
It’s difficult to understand why the tax credit lapsed. Yes, it cost the government money — but what program has brought more dollars to Main Street during the financial meltdown? Each additional home bought under the program created new demand for a wide array of goods and services related to homeownership, an important consideration during a time of high unemployment. Lastly, each sale also translated into less housing supply and perhaps firmer prices — good news for state and local governments funded in large measure by property taxes.

“Sales have been above year-ago levels for nine straight months, and inventory has trended down from year-ago levels for 20 months running,” said Lawrence Yun, NAR’s chief economist, in April. “The homebuyer tax credit has been a resounding success as these underlying trends point to a broad stabilization in home prices. This is preserving perhaps $1 trillion in largely middle-class housing wealth that may have been wiped out without the housing stimulus measure.”
The end of the tax credit will reduce real estate demand. In a marketplace which remains fundamentally weak, this means less pressure to push up prices (because fewer buyers will be in the market), more foreclosures (because home sales as a way out for distressed borrowers will be more difficult) and more short sales (because lenders will have less incentive to hold out for higher prices).

Looking Ahead
We can already see signs of where things are going.

Mortgage applications are a leading indicator of future sales, a hint of things to come. In March the FHA reported that it received 246,406 mortgage applications — that’s down 19.9 percent from a year ago. Most FHA purchase loans, almost 80 percent, go to first-time buyers.

Here’s another indicator: In July 2009 the government started the Car Allowance Rebate System (CARS), also known as the Cash for Clunkers program. The plan ended in August 2009 when money for the program ran out, a month when the annualized rate of sales for cars and light vehicles stood at 14.1 million units. And in September 2009? Vehicle sales fell to an annualized rate of 9.2 million units.

The expectation here is that with the end of the tax credit for first-time buyers home sales will shrink in the months ahead, and with less demand prices will soften. A portion of the good momentum gained during the past year to stabilize the market will be lost. As a result there will be an effort to re-establish the first-time credit program for homebuyers, so don’t be surprised if the credit again becomes available later in 2010.
Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site,

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