Is the tax credit necessary?
We might appropriately ask:
Is this an extraordinary time?
We surely would not want such a credit to be ordinary.
Well:
This is an extra-ordinary time.
It is the first time home price have fallen so severely in a generation.
To illustrate that, I'm going to reproduce here, one more time, the graph of the Portland, OR home prices over the last 22 years - as reported by the Case-Shiller Index (as reported by Standard and Poors and the Wall Street Journal) Your metro area may vary. (Only 20 cities are reported. Eighteen of the 20 showed increases in June and July. Data for August will be reported on October 27.)
Remember: Case-Shiller is indexed with 100 equalling home values in January, 2000:
What goes up wildly, can plummet tragically.
It is the first time ever that housing prices disintegrated because government policies had enticed, encouraged, and threatened lenders to do stupid things to chase low doc, no doc and just plain liar loans. It is the first time that such loans were being sold as securities by AIG. It is the first time the whole developed world was suckered into buying such securities to the detriment of the entire world economy.
It is the first time ever that home prices have fallen precipitously (especially in precipitating a world-wide recession) in a period of historically rock bottom interest rates.
The last time I remember housing prices falling so abruptly was in the early eighties, a period of high interest rates, high inflation and high unemployment. Those "misery index" conditions elected Ronald Reagan, who at first had NO housing policy. The national economy took a beating. The housing market did not improve until he got a housing policy.
We call that period a recession. In my then timber/lumber/housing-dependent region it was a depression. We went from having 1500 agents and 1500 listings to having 10,000 listings and 400 agents.
Now, you may think NAR sure wouldn't have liked that. But, believe me, you would not have liked that either.
Something needed to arrest the decline in home values since the government-caused-boom turned bust.
That decline had destroyed consumer confidence - which dampened consumer spending - which, unfortunately, is the engine of our economy and that of the world at large. The resultant loss of employment is still continuing.
Have home prices been bid up by this credit?
You bet they have.
The number of first time buyers has increased by NAR's 350,000 estimate. That represents an increase in home sales over-all of over 7 per cent.
Because of the income limits of the tax credit and the general relative poverty of first-time home buyers, the bulk of those buyers have been focused on low-end homes - below the local median.
Prices for any economic good are determined not by all buyers but by those at the margin of demand - those who have no urgency to enter the market.
A seven per cent increase in demand is always going to have a dramatic impact on prices.
But this has been a seven per cent increase focused on something less that half of the price spectrum. Tax credit buyers have not been buying junkers - they've been leaving those to the investors (who, incidentally, would just as soon keep everybody in the renter pool). Tax credit buyers have not been buying at the high end. Homes at the high end are languishing over nearly all the country. Prices at the high-end are continuing to fall nearly everywhere.
So call this an increase in demand for starter homes of at least 20%. Some economist with time on his/her hands could probably come up with a more accurate estimate.
Starter homes prices have stopped falling. They have increased in most places: with multiple offers in many markets.
Does that mean we are out of the woods?
No, we are not. Foreclosures abound. Employment will be slow to recover.
We need to not do something stupid.
Should the credit be stopped in November of any year? Not logically. We all know why - even those few of us who do not work in seasonal markets.
Should the tax credit be ended abruptly? No.
It should be phased out: continued into late spring or early summer at $8000, continued at $6000 through spring of 2011, reduced to $3000 though spring 2012 and then eliminated.
That should be done now and all at once...not done in pieces.
Only then (and only if we are lucky), will we have worked our way through most of the REO inventory and seen the trickle-up from sellers becoming trade-up buyers impacting the full housing inventory.
Then we can all go back to being advocates of no action on the part of government.
But we will ALWAYS have to watch Congress (and the NAR) like hawks: so that the boom that caused this bust is not repeated.
***********************
Jim Hale
Principal Broker / Owner
Graduate, REALTOR Institute e-PRO
2012 Member, Million Dollar Club of Lane County
2012 Member, Real Estate Brokers Million Dollar Club
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Eugene, OR 97401-1962
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All statistical market data is based on information from the RMLS of Oregon for the dates indicated.
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