A Win-Win Situation

Written by Lawrence Yun, Chief Economist, NAR Research

The recently passed - and signed -- housing stimulus bill means a housing recovery is on its way. This legislation will go a long way to help stabilize the housing market and make the dream of homeownership more attainable for many Americans. In addition, more families will be able to refinance into safer, more affordable mortgages, in many cases helping those households avoid a devastating foreclosure.

There are many facets to the recently enacted law. The one that I am most excited about is the home buyer tax credit. Up to $7,500 will be given to first-time purchasers as they file their income tax returns. The amount will be phased out above a certain income level and is to be no more than 10 percent of the home purchase price -- though first-time buyers will qualify for the full amount. (See page 8 for more details.) This is in fact almost like a "credit" -- the amount is equivalent to cash on tax returns. For example: you do your normal tax return and find that you owe $1,000 next year. You then apply the $7,500 credit and the government will send you a tax refund check for $6,500.

Yes, it's not all candy and roses. This credit has a time window and will not be available after July 2, 2009. And technically it is not a full credit because households will have to pay back this amount over a 15 year time period after the second year. In addition, the payback provisions have many conditions. (NAR Research will continue to analyze those.) But the worst-case scenario is that households would need to pay back the $7,500 over a 15 year time span beginning in 2010. In the case of the 2010 tax filing, taxpayers who took advantage of this home buyer credit would need to pay $500.

Even in this worst-case scenario, the tax credit is still a huge benefit to home buyers. Here's why. Money loses value over time - today's dollar is worth more than tomorrow's and certainly far more than it will be worth 15 years from now. That is due to inflation and the loss of interest income one could gain by squirreling it away. For instance, a winning strategy for the smart consumer would be to pay off a high-interest credit card debt with the tax credit money.

In addition, the tax credit it will likely have a big impact in getting the housing market moving again and so will contribute to lessening the foreclosure pressure. As foreclosures retreat, fewer need to be written down by banks and other lenders. Credit markets strengthen and mortgage capital flows more freely. The availability of loans grows, meaning more mortgages on more home sales. Increased home sales tend to foster improving home prices. Homeowners across the country will benefit as home prices strengthen. The economy will also improve - with higher aggregate income for U.S. workers and a lower unemployment rate. Basically, it's win-win.

I estimate nearly 3 million home buyers will have taken advantage of this benefit by the time the tax credit expires next year. These first-time buyers will also stimulate sales for trade-up, trade-down purchasers as they will be able to sell their homes.

The timing for all this is good, as the housing market is already poised to make a bit of a turnaround. Yes, on a national basis existing home sales fell in June to their lowest level in 10 years (4.86 million units, seasonally adjusted annualized rate). But even so, the pace is not too far off the 5 million sales mark. Furthermore, pending home sales rose in June, pointing to more closings in the months ahead. In addition, there were significant local market variations. Sales have continued to ramp up in markets where prices have come down by 20 percent to 30 percent. Bargain hunters and first-time home buyers who had been priced-out during the boom years have returned to the market. Sales are rising strongly on a year-over-year basis in a number of markets: Ft. Myers FL, Las Vegas NV, Riverside CA, Sacramento CA and Prince William County, VA. Other markets beginning to experience rising sales include Orlando, Phoenix, and Oakland.

I am also hopeful that home prices will soon begin to stabilize. The latest data on prices showed a mild deceleration from the recent past. The national median existing home price in June was $215,100, which is a decline of 6.1 percent from one year ago. The declines in the four previous months had been -8.4 percent, -8.0 percent, -8.5 percent, and -6.6 percent. Regionally, the price decline was the sharpest in the West region, falling 17.2 percent - this also explains the overall sales increase in that region. Prices declined 12.6 percent in the Northeast and 2.4 percent in the South. The median price actually rose in the Midwest by 2.8 percent. The speedy price declines of 20% to 30% in a short 12 to 18 month-span in some of the hard-hit markets have been very painful for homeowners who bought during the peak years. But the price declines and the recent rising sales in these regions suggest most of the price declines may have already occurred.

Overall, the market is ready to start recovering. The tax credit should prove to be a big shot in the arm for first-time buyers. In addition to the tax credit, the stimulus package permanently raises the loan limit for FHA and GSE loans, thereby saving consumers thousands of dollars in mortgage interest costs. NAR, of course, has been working diligently for years for some of the provisions in the housing stimulus package - all that hard work has paid off and both home buyers and sellers will benefit.

This article is taken from Real Estate Insights - A publication provided by NAR. This article was published August 2008.