Wednesday, September 16, 2009

What Happens To Real Estate Market When Tax Break Ends?

Think of this as the cash for clunkers program for real estate. The notion of providing a tax credit of 10% of the price of a new home (up to $8,000) for first time home buyers.

It was meant to prop up a collapsing real estate market, but the question becomes can the real estate market support sales without the credit to goose the figures?
As many as 40 percent of all home buyers this year will qualify for the credit. It is on track to cost the government $15 billion, more than twice the amount that was projected when Congress passed the stimulus bill in February.

In the view of the real estate industry and some economists, all that money is well spent. They contend the credit is doing what it was meant to do, encouraging a recovery in the housing market that is gathering steam. Analysts say the credit is directly responsible for several hundred thousand home sales.

Skeptics argue that most of the money is going to people who would have bought a home anyway. And they contend that unless it is allowed to expire on schedule in late November, the tax credit is likely to become one more expensive government program that refuses to die.

The real estate industry, including the powerful 1.1 million-member National Association of Realtors, wants Congress to extend the credit at least through next summer. The group hopes to expand the program to $15,000 and to allow all buyers, not just those who have been out of the market for at least three years, to qualify. The price tag on that plan: $50 billion to $100 billion.

Joseph and Chassity Myers are among the two million buyers eligible for the credit this year. The newlyweds heard they could get money from the government for something they were tempted to do anyway.

“It was a no-brainer,” said Mr. Myers, a commercial underwriter. “Owning something is the American family dream.”

The couple bought a two-bedroom condominium here in the spring for $171,000 and amended their 2008 taxes immediately, receiving their windfall by direct deposit a few weeks later.

Their home is now a monument to the government’s generosity. They bought a leather couch, a kitchen table, a bed, television stand, china cabinet, kitchen table, coffee table, grill and patio set.

“We did exactly what the government wanted us to do,” said Ms. Myers, a third grade teacher. “We stimulated the economy.”
Here's a more important question that whether the Myers bought a bunch of home furnishings. Did they prop up a sagging real estate market that needed still more correction bringing the markets into more affordable and realistic pricing point? Bear in mind that the condo bought by the Myers was in a property where only 30 of 70 units had been sold. That shows serious weakness in the market that indicates that a further drop in prices was needed.

In other words, has this program actually made homes less affordable because home prices were supported from. Say that homes purchased in the area were propped up by thousands of dollars, that means that the Myers family bought a home and will pay more monthly than they would have otherwise done. The artificial nature of the homeowner credit distorts the real estate markets, and further delays the correction.

On the flip side, the credit could be seen as softening the crashing real estate prices, and giving existing homeowners some support when they go to sell given that so many are underwater on their mortgages because they bought into a bull real estate market. However, on the whole, this distortion of the market will mean that the real estate markets will take longer to recover, will rely on more government programs (or an extension of the existing credit) and other measures to spur growth.

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