Home Buyer’s Tax Credit Expires This Week – What Happens Now?
The home buyer’s tax credit expires at the end of this week. If you don’t have a contract together by then (you
have until the end of June to close), you are out of luck for the tax credit. Last November, when the previous tax credit expired, the housing market feel off the edge. At the time the consensus view was that the tax credit hadn’t so much brought new buyers into the market, but had motivated many home buyers who were already planning to buy, to buy earlier than they would have otherwise. Without the tax credit the market floundered, and a month after the tax credit expired it was started up again. That isn’t likely to happen this time. It’s not that the credit hasn’t increased business, it has worked well this time. Home sales last month were the highest in years, and this month will have sizzling numbers, too. But the extra sales have come at a high cost, especially if most of these buyers would have bought any way. For another thing, no one is pushing hard for a new extension. The National Association of Realtors (NAR) was the big force before, and they are silent on the issue now. The congressional sponsors of the bill before have said they won’t try and get it extended. And though the real estate market is still soft, the worry over adding new debt (the government is borrowing to pay for the tax credits they send out) is trumping any additional rebate money now. Many economists have said that the tax credit, while a great deal for the consumer, is inefficient and an expensive way to increase home sales. So in all likelihood, the tax credit will be gone for good after this week.
So the question now, is what happens next? A big portion of the buyers now in the market are first time home buyers, and though they are looking at all the benefits of buying now (historically low rates, low down payment FHA loans are available and home prices are priced at a big discount over previous years) the tax credit is mentioned as a major incentive. But I don’t think we are going to see the big drop off we did before. There will be a drop off, many of the current buyers moved quicker than they otherwise would have to take advantage of the rebate, but there are some big reasons to expect that home buyers will continue to buy.
Here are some reasons why it is different this time, and why I expect home buyers to continue to buy after the tax credit deadline:
It is the Spring market – Real estate sales are seasonal. Traditionally the market is most active in the Spring and Fall, and drops off to nearly nothing after Thanksgiving. When the last tax credit expired in November, it happened at a time when the market normally chilled. Now is the time when it is usually just starting to heat up. A lot of buyers have moved the timeline ahead this year, but there are a whole lot of others who for one reason or another are just getting started.
The home buyer’s tax credit didn’t seem as urgent this time – There are still a lot of people who could be eligible for the tax credit, who weren’t aware of it, or the deadlines, and a lot of others who figured there was no urgency since it was extended once and it could be extended again. Many of these people will buy a house eventually, but they aren’t motivated enough by the tax credit to rush forward now and buy something that isn’t exactly right for them.
Buyers are looking for bargains – Home buyers are mostly focused on getting a home for a below market price, and this market is dominated by short sales and foreclosures. As a rule, these transactions are more complicated, so it takes longer to get the selling bank’s approval. If your real motivation is to buy a home at a discount price, a relatively small tax credit won’t make a big difference. I know of a lot of buyers who have contracts with sellers now, but are waiting for bank approval, some have been in this waiting game for months. Some of these buyers will get bank approval and be able to close by the June deadline. Others won’t and some will move on to other properties. One thing that could make a big difference is what happens with the rollout of the new HAFFA short sale program. This is the new government program designed to give incentives to both distressed owners and loan servicers to agree to a short sale, and if it is effective it could mean that there will be more short sales and they will happen quicker. I’ll have more on the details of this program soon.
The housing market appears to be bottoming – Fear has kept a lot of potential home buyers on the sidelines. Home prices have dropped a lot over the last few years, but there are buyers waiting on the sidelines who want to buy, but don’t want to come in too early. A recent report showed that homeownership rates were historically low in the 24-35 age range, the age group that is most likely to be first time home buyers. Some of these people are qualified to buy but don’t see owning a home as a good investment now. Others are waiting for the right time to get in. With the end of the tax credit, some home sellers are sure to get a little more motivated. At the right price, there are buyers.
We will see what happens over the next few months, but I don’t expect the sharp decrease in home sales we saw after the end of the last tax credit. It is still a buyers market, and with the conditions right, home buyers will continue to buy.
Thinking of buying but not sure where to start?
First Time Home Buyer Webinar this is a recording of a webinar I did recently which goes over the entire home buying and mortgage process in just under an hour.
Free Home Buyers Guide – From A to Z, everything you need to know about buying a home and getting approved for a loan.
Peter Thompson 630-479-6424