What Was the Real Impact of the Housing Tax Credit?

Home buyer tax credit fails as a turbocharger for Savannah market

By Adam Van Brimmer, Savannah Morning News, Ga.

Hindsight reflects poorly on Version 2.0 of the federal homebuyer tax credit.

The credit -- established Nov. 6, 2009, and redeemable for up to $8,000 off the income taxes of first-time homebuyers and $6,500 for eligible repeat buyers -- failed as a turbocharger for the local housing market.

The credit expired April 30, although buyers with homes under contract as of that date have until Sept. 30 to close and occupy the new residence.

All but a few of those deals are complete. And the numbers lead local real estate professionals to use words like "bust," "flop," and "disappointment" to describe the credit's impact.

Sales of single-family homes, modulars, townhouses and condos through the first six months of 2010 were flat compared with the same period in 2009, when only first-time buyers were eligible. And many of those buyers waited until late summer and early fall to take advantage of that initial program.

But proponents of the credit point to what the statistics and hindsight fail to show: How much worse the housing market might have been without the incentives.

Treading water is better than drowning, they say, and if the credit kept the market afloat, then it was far from a failure.

Labels like success and failure aside, the credit's impact -- and the factors behind it -- demonstrate housing's economic complexity.

A sensible idea

Extending and expanding the tax credit seemed logical last fall.

The initial program for first-time buyers carried the market in 2009. First-timers accounted for as much as 70 percent of home purchases nationwide last year.

Locally, the percentage of first-time buyers was lower, but not by much. Exact figures are not available, but financing data for local sales reveals more than 50 percent of purchases made last year were secured using FHA and VA loans, which require little money down and are the loans of choice among first-time buyers.

Extending the credit for those predominantly young buyers meant more new blood for the market -- vital considering the number of homeowners who lost their houses to foreclosure and became renters last year. The more first-timers buying now, the earlier they will shop for bigger or better houses and aid the market down the road.

Plus, a good percentage of first-timer buyers purchased newly constructed homes, helping homebuilders weather the recession.

Expanding the credit to include repeat or "move-up" buyers would further stimulate the housing market, proponents claimed, especially in higher-priced neighborhoods. The first-time buyers gobbled up houses priced under $200,000 -- the so-called "starter homes" -- but the initial tax credit did little to boost activity outside that price point.

Offering a $6,500 incentive to current homeowners would expand the credit's impact to include the higher-priced addresses, the thinking went. Young families are always looking to trade in their two-bedroom for a three- or four-bedroom or move into a better school district.

An expanded credit would do for the market what shifting from second gear into third does for a car.

Bumps in the road

Yet the tax credit's ability to accelerate the local housing market depended on the navigation of several obstacles.

-- Labor market growth. Unemployment needed to shrink and employed Americans had to feel more secure in their jobs. Job insecurity is synonymous with financial uncertainty. Few make six-figure purchases when wondering from where their next paycheck may come.

-- Increased demand. For move-up buyers to move up, most needed first to sell the homes they currently owned.

-- Continued first-time buyer interest. First-timers would buy the homes the would-be repeat buyers were selling and keep the homebuilders busy and the market growing.

The Savannah area fell short on all fronts. Unemployment remained above eight percent. Would-be repeat buyers struggled to sell without significantly cutting their prices, and lower prices meant less equity to invest in an upgrade.

As for the first-timers, their numbers dropped precipitously. FHA/VA-backed purchases were down 24 percent in the first six months of 2010 versus 2009.

Many local real estate professionals believe the reason for the drop was the initial tax credit, which was scheduled to expire Nov. 30 until the government extended it, coaxed many spring 2010 buyers to purchase early to ensure themselves of the $8,000 bonus.

Lingering effects

The focus now shifts to the credit's impact on the Savannah market post-deadline.

Just as the initial credit borrowed first-time buyers from spring 2010, the expanded credit may have stolen move-up buyers from the second half of this year.

The number of pending deals has dropped since the credit's contract deadline on April 30. But there are extenuating circumstances that could help the market maintain its current levels and possibly even grow:

-- Mortgage rates: Stock market uncertainty has led to heavy investment in the bond markets, which in turn have kept mortgage interest rates down. Interest rates are tied to bond yields, and the higher the demand for bonds, the lower the yields.

The average 30-year fixed rate currently stands at 4.62 percent after hitting record lows last week. Each tenth of a point change in interest rate equates to thousands of dollars over the life of a loan.

For example, a borrower would pay about $17,000 less in interest on a $200,000 loan at 4.6 percent than he would on the same loan at 5 percent.

-- Home prices: Sluggish sales have kept prices in check as well. The overall average sales price for the first six months is unchanged from a year ago, although prices are down significantly in several Savannah neighborhoods.

Single-family homes on the Southside are down 10 percent, West Chatham has seen a 3 percent decrease, and Skidaway Island is off by 9 percent.

And overall, prices are down more than 10 percent from where they were through the first six months of 2008, which marked the eve of the housing slump locally.

Local real estate professionals agree a housing recovery here goes deeper than a tax credit. A strengthening economy and all that comes with it -- more jobs, more retiring baby boomers, more tourism and ports activity -- will be the spark for the housing market.