First-Time Homebuyer Tax Credit Hangover
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An ugly trend in the Mortgage Bankers Association's Weekly Applications Survey has real estate warning sirens blowing again. As the result of a relationship we see between mortgage activity and the First-Time Homebuyer Tax Credit, we are looking for a near-term pull back in the residential real estate marketplace.
First-Time Homebuyer Tax Credit
Before we tie the information together, we think it best to ensure the reader understands the First-Time Homebuyer Tax Credit. The Worker, Homeownership and Business Assistance Act of 2009 extends and expands the First-Time Homebuyer Tax Credit allowed by previous acts. Most importantly to new homebuyers, Congress extended the tax credit, which was set to expire this year. Prospective purchasers of a principal residence can now benefit from the tax incentive if they enter into a binding contract to buy a home before April 30, 2010, and close on the home by June 30, 2010. The credit, which remains $8,000, can be applied to reduce your tax bill dollar for dollar, or to boost your tax refund, in either the reported 2009 or 2010 tax year (for qualifying 2010 purchases).
A new facet of the legislation allows long-time homeowners to benefit as well. Those who have lived in the same principal residence for any five consecutive year period during the eight-year period ended on the date the replacement home is purchased, may take a $6,500 credit (up to $3,250 for married filing separately). Also, the income limit has been raised to allow more Americans to qualify. Tax credit phase out now occurs at individual income levels of $125K to $145K ($225K to $245 for joint filers).
As you can see, the First-Time Homebuyer Tax Credit provides great incentive to buy a home. Thus, a great many Americans, some advised by clever and perhaps starving real estate agents, rushed to buy homes before the previous credit would expire on December 1st. Since home closings typically take 60 days, early October marked the effective deadline for entering into contract. We think this factor drove a burst of home sales, as was intended, up to and ending in early October.
The Evidence is Clear
The last six weeks of Mortgage Activity highlighted the effect of the legislation in vivid color. Despite a favorable and consistent drop in the average contracted rate on 30-year and 15-year fixed rate mortgages, mortgage activity for the purchase of homes has declined decisively. Up until the latest reading of the Mortgage Bankers Association data, the Refinance Index, which measures contract volume for mortgage refis, had shown refinance activity benefiting from lower rates; during the same period though, the Purchase Index deteriorated consistently. In fact, purchase activity has decreased for six consecutive weeks now, and sits at its lowest point since November of 1997.
Tying the Setback in Housing to its Cause
If the then pending expiration of First-Time Homebuyer tax incentive (before its renewal) and the push of real estate and tax agents to help sales along, helped to drive home purchase activity ahead of the decline begun in early October, then perhaps significant demand has been pushed forward. Thus, similarly to the effect of the "Cash for Clunkers" program, we would expect home sales to teeter off in the coming month or so. While this article comes to you after the latest Housing Starts data, which showed a precipitous decline in the pace of Starts in October, the report now seems to only confirm our assumption that the housing recovery benefited significantly from the First-Time Homebuyer Tax Credit. Furthermore, the previous gains in home sales may have been due to pushed forward purchases that may now limit near-term sales in their absence.
Add to this the burdensome weight of still rising unemployment and tightly squeezed credit standards, and the real estate market seems set for a longer near-term retrenchment. Perhaps offering a counter to this, however, is the expansion of the legislation to bring higher income and existing homeowners into play. This wise decision seems clearly construed for the purpose of floating the housing market further down the economic stream. November Starts should provide telling results as to whether the effort was effective or not.
Editor's Note: This article should interest real estate industry participants, perhaps including in Bank of America (NYSE: BAC), Freddie Mac (NYSE: FRE), Fannie Mae (NYSE: FNM), Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Wells Fargo (NYSE: WFC), Toronto Dominion (NYSE: TD), UltraShort Real Estate ProShares (NYSE: SRS), Ultra Real Estate ProShares (NYSE: URE), ING Clarion Global Real Estate Income Fund (NYSE: IGR), Xinyuan Real Estate Company (NYSE: XIN), Rydex Real Estate H (Nasdaq: RYHRX), T. Rowe Price Real Estate (Nasdaq: TRREX), Toll Brothers (NYSE: TOL), Hovnanian (NYSE: HOV), D.R. Horton (NYSE: DHI), Beazer Homes (NYSE: BZH), Lennar (NYSE: LEN), K.B. Home (NYSE: KBH), Pulte Homes (NYSE: PHM), NVR, Inc. (NYSE: NVR), Gafisa SA (NYSE: GFA), MDC Holdings (NYSE: MDC), Ryland Group (NYSE: RYL), Meritage Homes (NYSE: MTH), Brookfield Homes (NYSE: BHS), Standard Pacific (NYSE: SPF), M/I Homes (NYSE: MHO) and Orleans Homebuilders (NYSE: OHB).
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