The homebuyer tax credit land rush

Homebuyer Tax Credit II will drive more than 2 million home sales this year. How many of those contracts are going to go up in smoke?

|
Melanie Stetson Freeman/The Christian Science Monitor/File
Newer homes at The Forum housing development in Fort Myers, Fl., await buyers in this photo. The Fort Myers' housing market collapsed and the area had one of the highest percentages of foreclosures in the country. Now the area is rebounding as first-time buyers and others buy up devalued homes. The home buyer's tax credit is also helping.

If your neighborhood is anything like mine, “under contract” signs are blossoming like dandelions. Many (of the signs, not the weeds) were very likely the result of the artificial land rush created by tomorrow's expiration of Homebuyer Tax Credit II. The credit gives $8,000 to first-time buyers and up to $6,500 to move-up buyers.

The National Association of Realtors predicts the credit will drive more than 2 million home sales this year. But I worry a bit about those “under contract” signs. The law requires only that the paperwork be signed by April 30, but the deal does not have to close until June 30. And I can’t help but wonder how many of those contracts are going to go up in smoke.

Will these buyers actually be able to get the credit they need to complete their purchase? To protect themselves from busted deals, many sellers are reportedly demanding pre-approval letters from lenders. But I suspect some sellers, whose homes may have been languishing on the market for two years or more, may not be so cautious. Plus, according to USA Today, some of these pre-approvals are being OK’d in as little as an hour. Care to wager whether the documentation on these will hold up?

And how about the buyers? Facing this you-have-to-buy-today hard sell, there is a good chance some will take the only mortgages they can afford, which is to say variable rate loans that will blow up on them in five years. Memories are indeed short.

The credit-induced artificial deadline has helped create a toxic brew of hungry real estate agents, ravenous mortgage brokers, desperate sellers, and frantic and inexperienced buyers. We learned what happened with Homebuyer Credit I. That tax subsidy led to massive fraud (including a large fraction of people claiming the credit who never bothered to buy a house). It also produced both a rush to buy before it (almost) expired last fall, and the inevitable sag in sales that followed.

As my Tax Policy Center colleague Ted Gayer has noted, 85 percent of those who took last year’s credit would have purchased anyway, and the credit merely encouraged them to buy a few months sooner. As a result, Ted estimated it cost the government about $43,000 for each additional sale

My bet is this year will be more of the same. For those who would have bought anyway, the credit will be a pure windfall. At the low end of the market, some will never close their purchases. And of those who do, many will be unable to manage the costs of expensive financing. Sound familiar?

At the same time, more than a few sellers will get burned when their contracts crumble. And, after this subsidy-induced burst of activity, we will still be faced with the real problem: an oversupply of housing, especially after a likely new round of unemployment-driven foreclosures. Don’t be a bit surprised to see third quarter home sales fall after this quarter’s gusher.

Oh yeah, and the Treasury will have given away another $11 billion. And, as Ted notes, because the sales surge will be smaller this time than it was under the old credit, the subsidy per additional home purchase will be even higher. What a deal.

Add/view comments on this post.

------------------------------

The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.

You've read  of  free articles. Subscribe to continue.
QR Code to The homebuyer tax credit land rush
Read this article in
https://www.csmonitor.com/Business/Tax-VOX/2010/0503/The-homebuyer-tax-credit-land-rush
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe