To qualify for the $8,000 federal tax credit, buyers have to secure a “binding” contract by the end of today, and close escrow prior to June 30th.
Has there been a mad rush over the last week to lock down a contract? Yes, buyers are looking feverishly, but it doesn’t look like many are buying just because of the tax credit – it still has to be the right house.
Here are the numbers of detached listings that have been marked pending over the first four days of this week, compared to all five days of last week – we’ll check back next week to see how many were marked pending, dated today (or backdated over the weekend):
| # of PENDS | NSDCC | SD Co. |
| Last Week | ||
| This Week |
In the end, both the federal and state tax credit will be bonus money for buyers who happened to be in the right place, at the right time.
There has been a real push to extend escrows that were originally planned to close in April, into May to be eligble for the state tax credit too. In a couple of weeks we’ll look back and see how the first-week-of-May closings compared to last year, but it’ll be hard to determine how many closed just because of the state tax credit – because in North SD County Coastal the detached sales have been much stronger this year overall:
| SOLDS 1/1-4/23 | NSDCC | $$/sf | SD Co. | $$/sf |
| 2009 | $399/sf | $214/sf | ||
| 2010 | $381/sf | $244/sf |
A 44% increase in North SD County Coastal detached sales, year-over-year!
Jim – It feels like Christmas today…finally a gift for us who don’t want a propped up phony market…the gift of a disappearing subsidy.
One can hope that it is the start of a recorrection towards transparent prices more reflective of incomes.
I get daily updates from redfin on the few searches I’m keeping my eyes on. normally there’s 1-2 new houses and <5 updates. today there were 2 new homes and 17 updates. all KINDS of activity yesterday. I imagine my email tomorrow will be quite long.
then what? will the entire RE market slow to a crawl? will we not miss a beat cause its prime buying/selling time?
Two issues:
1. If an offer is presented to a seller on Monday, May 3, 2010, and the offer says that it must be accepted by April 30, 2010, do you think there is any chance the deal would go through. The “acceptance date” seems quite soft in this regard. That said, the further past April 30, the less likely that these deals will surface. It is more difficult to modify the closing date, as there are more many people involved.
2. Are all the homes across America suddenly going to be worth an extra $6.5k to $8k? I realize that $8k is a small percentage of the value of many of the homes you feature here. In some markets, the $8k is closer to 10% of the home’s selling price. If we take a $80k home today, then a buyer could buy it for a net $72k, or $80k tomorrow. If I were a buyer, I’d only offer $72k tomorrow, but maybe there are plenty of other buyers who were willing to pay $80k? If so, why did we need the tax credit?
My belief is that the $8k credit has increased the “value” of most homes by more than the $8k.
Psychologically, most people would rather have $8k now, than, say, $60k stretched out over a period of years. So they would be willing to pay quite a bit more than they otherwise would have just to get the $8k.
Also, many of those using low downpayments may see the $8k as all or part of their downpayment. Without the cheese, they would not have been able to – or willing to – put down enough downpayment for a higher priced home.
The net effect is that this $8k has significantly increased leverage in the housing market. As we all know, leverage works great when prices are going up, but is very painful when going down.
In all, my back of the envelope calculation is that the tax credit has propped prices up about 5%-10% for most homes. If the economy doesn’t improve a lot very quickly, then I fully expect home prices to drop by at least these amounts over the remainder of the year. And we are looking at some serious hurt if we have a significant rise in interest rates.
“Psychologically, most people would rather have $8k now, than, say, $60k stretched out over a period of years.”
Are you describing the rise in credit card lending? How many people are making the $60k worth “low monthly payments” on the $8k worth of crap that is long gone?
I know what we need: Bankruptcy reform! That will solve all the basic economic problems.
I see this in so many areas. “Buy here, pay here” car lots, the “need cash now” annuity cash out commercials, credit cards that charge 25% or more, and so on. To think, housing was sold as a sure thing–it’s what responsible people buy.
Also, many of those using low downpayments may see the $8k as all or part of their downpayment. Without the cheese, they would not have been able to – or willing to – put down enough downpayment for a higher priced home.
That’s just not possible anymore to use the $8K as a part of the down payment. It hasn’t been since last December when the new credit took effect. The amount of time it takes to process is 6 weeks because you have to send in a paper return. The reality is that I’m scheduled to get my money on May 18th, when I submitted the paperwork back in February. It was more like a month to “receive my return” and 6 weeks to process my return. You also must provide documents to the IRS that you’d typically not have until the house has closed escrow.
Even if you do all that the IRS is now conducting audits where you have to prove that the house is your primary residence in some way. At least right now, you’d need somebody to loan you the $8K.
I can say from looking at what happened the last week in Orange County that the change was STUNNING.
I mean, it was WAAAY more than the expiration last time. Either everyone waited for the last minute or it had a larger impact.
Of course, the economist in me hates to see falsely propped up markets. Reminds me of so many Dr. Seuss drawings. We’ll see if the vipper of vip falls or not.
Chuck
Cant say that if I was going to buy a 400k home today (there is really nothing nice to buy in SD county at that price…) I would be swayed at all by an 8k tax credit, its meaningless when you look at it as 2% of the home sale price.
When is the last time you jumped in the car to get 2% off a blue light special at K-Mart!
Jordan T, that is why I said people “see” it as part of their downpayment. They will either use $8k more out of their savings than they would have otherwise or put everything on credit cards until they receive the credit. Heck, they probably won’t even pay off the credit card after they receive the credit.
To say it another way, without the tax credit, many people will not put down the extra $8k in downpayment.
To be fair, one could take out a loan for the $8k–one of the few cases where borrowed money was approved to be used for the down payment.
To say it another way, without the tax credit, many people will not put down the extra $8k in downpayment.
I disagree that many people are putting $8K more down than they would on a home, just because a tax credit is incoming. If I pull $8K out of my savings, why would I need to use a CC to float expenses for a few months. Somehow I saved up that $8K in the first place, which means I take in more money than I spend.
JordanT-
You are not looking at this quite right.
Let’s assume you have the $8k in the bank. For the sake of simplicity, let’s assume you are going to buy a $100k home. Also for the sake of simplicity, let’s assume you need $8k in cash.
Maybe, without the tax credit, you would not feel comfortable spending every cent of your savings. With the tax credit, you end up spending $92k after the $8k is given to you by the IRS.
Accounting:
Start:
Asset: $8k savings
Liability: $0
Equity: $8k
Right After Closing (cash accounting):
Asset:
$0 Savings
$100k home
Liability: $92k home
Equity: $8k
(The cash basis is the reason that I cannot accrue the $8k that is due from the IRS)
After the IRS sends cash:
Asset:
$8k savings
$100k home
Liability: $92k home
Equity: $16k
Of course “equity” is based on the book value of the home. The market value has likely changed from $100k.
Now getting back to your basic claim, “I disagree that many people are putting $8K more down than they would on a home, just because a tax credit is incoming.” Essentially you are suggesting that with the $8k due and owing from the IRS, buyers are not willing to put one cent more down on a home. There is at least one case where this is not true, and thus, some amount extra is being applied to down payments.
For the sake of argument, take a person that took five years to save $16k. They are looking to buy homes in which they need to put down anywhere from $8k, for a less expensive homes, to $16k, for the nicer homes. Assuming they are somewhat financially conservative, they would lean toward the less expensive homes so they don’t completely deplete their savings.
Now through in the $8k tax credit and they can afford to get a home in the upper range. They may even be able to exceed the previous upper range if they take out a loan or “save” more by putting their expenses on CCs.
The net effect is that more people are willing to buy at significantly higher prices. Hence, we have prices that are much higher than they otherwise would have been. And then throw in the governement sponsered low supply… and, bingo, the law of supply and demand causes prices to go ape sh!t.
I guarantee you this is a significant part of the action going on right now, particularly in the low to mid range home market.
JP2 beat me to it!
One more comment: The $8k could be legitimately borrowed. A person could disclosed that they borrowed the $8k from parents, for example, and that’s fine. Generally speaking, borrowed money cannot be used for the down payment.
Eight grand (or $18k with the state credit) today is worth a lot more than eight grand (or $18k) paid over thirty years. That is, I would expect prices (on the lower end) to drop by significantly more than eight/eighteen grand very soon. I would also expect inventories (again, on the low end) to rise significantly as a lot of buyers rushed to get the credit(s).
Probably not much of a factor on most properties over a quarter million or so, though.
Geotpf- If you could give a duration and discount rate, we could compute exactly how much $8k today is worth. The same is true with credit cards. So many people borrow $8k on credit cards and pay 25% interest, or more. That $8k today is worth a lot.
Try offering a small child:
A. One piece of candy before dinner,
or
B. Two pieces of candy after dinner.
Most small children take the one piece before dinner.
If a buyer were to use the $8,000 as the down payment on a house (let’s assume the seller will credit $X to cover closing costs), and if that buyer uses the 3.5% FHA loan, then that $8,000 is 3.5% of ~$228,000. In other words, you just took a buyer who couldn’t buy a dog house and — with the magic of “free” govt money and leverage — added one more “qualified” buyer to the pool of people looking to buy a $228,000 house. Is it any wonder we saw sales and prices in the sub-$228K range take off after the tax credit was announced? The new demand works its way all the way up the housing chain.
For every buyer (at all price points) that uses an FHA loan with the $8,000 tax credit, their spending power is increased by $228K. Even for buyers who are using 20% down, their spending power is increased by $40,000.
Mind you, this isn’t in favor of the buyers; it favors the sellers. Not only is the buyers’ spending power increased; new demand is added that would never have been there without the tax credit and FHA loans. Sellers will take advantage of this by raising prices to offset the buyers’ increased spending power.