By Danielle Hale, Research Economist
The Tax Credit is Over
April 30, 2010 has passed. Home buyers seeking to claim the first-time homebuyer tax credit must now have a binding contract in order to be eligible. Those with eligible binding contracts must now close by June 30. Already experts are weighing in on whether the program was or was not successful. This determination largely depends on their assessment of the goals for the program, which vary substantially. Further, when examining the success of the extended tax credit specifically, the jury is still out because sales and price data for the months just before the end of the credit are not yet in. Here we’ll look at what we know about the tax credit, what we can pay attention to going forward to know what kind of an impact the credit has had, and finally some different ways of measuring tax credit success.
But Data on Credit Sales is Still Coming In
For existing homes, there are two sales measures, Existing Home Sales, which are based on closed contracts, and Pending Home Sales, which are based on signed contracts. New home sales data from the Census is based on signed contracts; there is not an equivalent closed-contract series for new home sales. Pending home sales tend to lead existing home sales by a month or two. This means, increases in pending home sales are usually mirrored in existing home sales the following month. Before the tax credit was set to expire in November, we saw large upticks in pending home sales in July to October 2009 and corresponding increases in existing home sales in September to November 2009. Because the November tax credit expiration date was based solely on closings, the analogous date for an analysis of the extended credit would be June 30. If the flurry of activity pre-expiration is repeated, we would expect to see increases in pending sales from February to May 2010 and the surge in existing home sales from May to June 2010. We have seen increases in pending sales in February and March and existing home sales increased notably in March.
US Home Sales
Credits Claimed and Estimated Eligible Buyers
Of course not all home buyers are eligible for the tax credit. Buyers must meet conditions to be a first-time buyer, and the credit is limited based on income. Using buyer characteristics from the 2009 Profile of Home Buyers and Sellers, we estimated the number of home buyers eligible for the tax credit based on homes purchased in calendar year 2009 and from January 2009 to March 2010. These numbers are side-by-side with information from the IRS via the Treasury on the number of home buyers who have filed for the tax credit through January 2010.
When Will We Know
NAR estimates for the entire tax credit period will be available after the June Existing Home Sales data1, but IRS information will take much longer. Buyers who purchased in 2009 had the option of filing for the credit on either their 2008 or 2009 tax forms. Buyers who purchase in 2010 can elect to file for the credit in 2009 or 2010, so some information may not be available until after April 2011.
Of course, the credit’s impact extends beyond the number of home sales. There is evidence of the credit in stabilizing home values and inventory as measured by months-supply. The graph below shows year over year changes in the NAR median price and FHFA purchase-only house price index. Similar trends are seen in Loan Performance and Case-Shiller data (not depicted). Stabilization of the housing market is an important factor in the confidence of America’s 75 million home owners who have a significant amount of net worth invested in their home. Whether the tax credit has helped returned the housing market to a balance that can be sustained without the credit incentive remains to be seen. That data will begin to come in more than two months from now. One necessary factor will be job growth. The employment situation report released this past Friday is a key indicator. While the increasing unemployment rate may disappoint some, it is actually a sign of an improving market. Further, the 290,000 jobs created in April is a trend we want to see in the months ahead.
US House Prices
Opinion – Waste or Success?
Some have called the tax credit a waste of taxpayer funds. It is estimated that 4.4 million homebuyers will eventually receive the tax credit, of which, about 1 million were induced buyers. That is, one million buyers who would not have entered without the tax credit came into the market. Looking only at these figures, many credit-eligible buyers would have bought their home even without the credit. With this narrow target as a goal the effectiveness of the program is debatable.
However, from a wider angle the tax credit was a success. The homebuyer tax credit benefits homebuyers and the industry but even more so aids the broad middle-class of home owning families. Most homeowners are not in the market to buy or sell, yet they experience the fluctuation in home values. In the aggregate, homeowners suffered through $7 trillion in housing equity destruction from the peak to the end of 2009. Falling values ended the bubble and restored affordability but hurt owners who purchased at the peak or did cash-out refinances, essentially repurchasing their homes at the peak. But, there are many indications that home values not only fell, but were overcorrecting. Without the tax credit, economists had projected a further 10 -15 percent decline in home values that would have been another $1.5 to $2 trillion in wealth destruction for home owning families. Today, as shown above, home values are largely stable. In other words, the home buyer tax credit has preserved about $21,000 on average for each homeowner. This wealth preservation is laying the foundation for a broader economic recovery in 2010 as consumers feel more comfortable about their wealth situation and greatly improve bank balance sheets.
For more on the impact of the tax credit, listen to Lawrence Yun’s interview on NPR’s Morning Addition, April 30, 2010.
1Estimates may be refined in November 2010 as new demographic characteristics are available from the 2010 Profile of Home Buyers and Sellers.