When Tax Credit Vanishes, Will Buyers Disappear Too?

Jury's out on what will happen after tax credit for homebuyers expires

By Aldo Svaldi
The Denver Post

First-time homebuyer Jeff Romero has bid on more than 100 foreclosed properties in the past year, desperate to pocket an $8,000 tax credit that expires April 30.

With the clock ticking, Romero doesn't expect to get the Northglenn home he and his girlfriend are pursuing under contract in time. But losing that credit won't stop the 25-year-old from buying his first home.

"I have been very tempted to back out of our current offer and submit other offers," Romero said. "After talking it over with my girlfriend, we have decided that having the house of our dreams is more important than the tax credit."

The first-time-homebuyer tax credit, part of the stimulus package passed early last year, was designed to lure buyers. It and a $6,500 tax break for move-up buyers have done that, leaving some analysts worried that the tax breaks may have done the job too well and cannibalized future sales.

But the most popular view seems to be that housing markets are finally strong enough to stand on their own, without government support.

"Our sense is, based on what has been done and what has been occurring, the market can become self-sustaining by the end of the year," said Walter Molony, a spokesman for the National Association of Realtors.

Last fall, the group pleaded with Congress to extend and expand the tax break, which was scheduled to expire at the end of November, arguing that the market was too weak to manage without it.

Now, the NAR expects home resales will rise about 7 percent this year from last year, even with the credits going away. Homes must be under contract by April 30 and sales completed by June 30 to qualify.

Buyers undeterred

March was a "rock 'n' roll" month in metro Denver for homebuying activity, which should remain strong through June, said Gary Bauer, an independent real-estate analyst who tracks Denver's housing market.

"I fully expect that the market will continue to move along," he said. "Is it going to be a fantastic market? No. Will it be a negative market? No, unless something happens."

The credit definitely motivated Jennifer and Ronnie Holliman, who moved into their Parker home Thursday, to buy sooner rather than later.

"Our lease on our apartment actually isn't up until next December, so we had to break our lease," Jennifer said. "But we only did it because we knew we'd get the tax credit. Had it not gone through, we would have just waited until next year."

The credit covered their $2,500 lease-termination fee, she said.

But the number of homes being put under contract isn't at levels seen last October, when the previous deadline loomed, leading some analysts to conclude the tax breaks are not as important as they once were.

"Everyone has known about it, buyers are glad to get it, but it is no longer a central reason to buy," said Lou Barnes, a mortgage banker with Premier Mortgage Group in Boulder.

Take Romero, who still plans to buy a home without the credit. The credit would have gone to repay his father, buy furniture and create emergency savings.

As for the Hollimans, they plan to use some of the money left over to take their daughter to Disneyland for her birthday.

An even more important, if less visible, support for housing came from a Federal Reserve program that purchased $1.25 trillion in mortgage debt.

That unprecedented intervention, which ended in March, is credited with pushing mortgage rates below 5 percent and reversing a decline in home prices nationally.

Mortgage rates did jump from 5.04 percent on a 30-year loan before the program ended to 5.31 percent April 2, according to the Mortgage Bankers Association.

That increase also caused an index of mortgage applications to drop by 11 percent, although fewer people refinancing was behind that decline.

Mortgage rates could rise if private buyers don't step up and buy mortgage debt. Interest rates around 6 percent could kill activity, Barnes said.

But it appears the mortgage- rate spike was more the result of a positive jobs report that lifted interest rates rather than the Fed move. In an encouraging move for homebuyers, mortgage rates dropped back to 5.13 percent last week, Barnes said.

While the Fed hasn't bought any new mortgage debt since March 31, it is unlikely to dump the holdings it has. Also, little net new mortgage debt is being created. That means any rate increases should be moderate, said Cameron Findlay, chief economist at online lender LendingTree.

And there is a self-correcting mechanism. If mortgage rates rise, home values, which have been moving higher the past several months, could start falling again to restore equilibrium, Findlay said.

Findlay predicts that the U.S. median home price, now at $165,000 — a level last seen in May 2002 — will fall another 4.4 percent.

Some see trouble ahead

Some market watchers think things could get worse before they get better.

"All in all, I think we are in for a pretty dismal summer home-sales and housing-starts market," said Steve Wood, an economist with Insight Economics in Danville, Calif.

Combine exhausted demand, higher mortgage rates and another surge in distressed properties coming onto the market, and sellers could find themselves high and dry this summer, Wood contends.

Homebuilders who marketed to first-time buyers could end up the most vulnerable, said Lydia Lin, a broker associate with One Realty in Denver.

"They have relied heavily on this credit and retooled most of their new-home product towards the first-time buyer," she said.

And all bets are off if the economy weakens because stimulus funding runs out, employers stop hiring or interest rates shoot up.

Robert Shiller, who created the country's most closely watched home-price index, recently told Bloomberg that he sees the chances of the overall economy and housing markets going into a "double dip" as 50-50.

To understand where housing is headed, don't just watch mortgage rates, foreclosures and home sales, but job creation.

"The real issue for housing and as well as the economy generally is consistent growth in personal income," said Kansas City Federal Reserve Bank president Thomas Hoenig on a recent visit to Denver. "We need to have people with jobs."