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
actionagents.net
1715 Linnea Avenue
Eugene, OR 97401-1962
Office: 541-484-0219
Direct: 541-543-9991
Fax: 541-485-8068
Eugene Oregon Homes / Real Estate jim@actionagents.net
All statistical market data is based on information from the RMLS of Oregon for the dates indicated.
© 2012 All Rights Reserved / Licensed in the State of OREGON
Hi Jim, I think, the government should extend first time home buers tax credit.
John Pusa
Jim - You make some great points. I got in to this business in 1983 and got to see and experience what you are referencing. Because of that experience, what we're headed in to here is looking way to much like setting the stage for a repeat of those times - high unemployment; high interest rates with 8% predicted next year isn't high compared to the early 80s, but it will certainly have an affect on the market, don't you think? And who knows how high they will go from there. The wildcard is the home prices, which are still coming down in certain market segments in our area - BEFORE the release of the REO being held back by FNMA/FHLMC and banks.
John -
WE are not alone.
Karen:
The wildcards you mention argue for an extension of the credit.
Jim - Congrats on a wonderful post!
VB ;o)
Great Post!
Jim, I really like your idea about phasing out the tax credit through spring of 2012. It is a very logical idea and I think it would prove to help the real estate market immensely.
Jim,
Great post!
About 65% of our market this year is under 200K. Everything else is just sitting there. I'm not sure we saw as much tax credit activity as other places but we are at 10% unemployment. Until jobs improve I think it will be slow. Look forward to the "trade-up" buyers coming to the table.
Hang tough!
Excellent information and great chart.
Amazingly enough, we need the Government's help on this one. .
Jim If it keeps the market value from sliding further I am for it Karen
I wrote about the phase out plan awhile back and I agree that it would be a great way to not just cut those off who where unable to find a house before November 30th. But, I would like to see the $8000 tax credit stay in affect for whatever time it takes for those who bid on short sales and the lack of response from the bank has made it go past the November 30th deadline, because I see that is going to happen to quit a few!
Right now the government doesn't have a plan or if it does have a plan it is throw money at it, look the other way and hope the problem fixes itself, which I promise it won't do!
Great article my friend and we will be down Monday!
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What you are arguing for is that taxpayer pay abut $60,000 for each incremental home sale that results from extending the tax credit. Read this.
Then you have the unintended consequences.
Extending the tax credit, even with a phase out date, is just bad public policy. Home prices need to continue to fall until a market equilibrium is reached. Again, from Calculated Risk:
"Anyone analyzing the tax credit should call the economists at the BLS and ask about how falling rents will impact owners' equivalent rent and CPI. Then call the economists at the Federal Reserve and ask how CPI deflation will impact consumer behavior and monetary policy. Welcome to the Fed's nightmare."
There are so many opinions on this subject, all have good points, I am in favor of extending the tax credit and that is a great idea to decrease the tax credit over couple years. Plus, open it up to all buyers, not to just first time home buyers.
I agree with Jeff. The incremental cost of extending the tax credit cannot be justified, and there is little indication that it will do anything to stabilize the housing market. And, home prices were artificially inflated and needed to decline. Continued government interference in the housing market will only extend the pain that must come.
Jim, I love the phase out plan! I actually wasn't certain that I wanted it extended -- until I had sellers who had their houses on the market and buyers desperate to get into them -- and of course want the credit, so they are trying to settle right away. (Meanwhile my sellers haven't found where THEY are moving to -- so 30 days won't work!)
My hope is that what is in discussion right now at MINIMUM happens. To have a binding contract by November 30, then a 3 month grace period to settle.
What I am finding locally here is that the banks are so backed up that it is highly possible that these houses going under contract now won't meet the deadline. The credit, as it is, means these buyers, even though they are doing everything in their power, will most likely not get it. (Another perfect example is new construction, where they may have been under contract for six months already and the builder hasn't delivered!)...
Great post, and interesting commentary. Thanks, Jim!
Nicely demonstrated graph and explanation, I too have noticed increased traffic in the first time homebuyer "price range" in my market, but I'm not sure extending it or phasing it out is the right answer for the rest of the housing market
VB, Laura -
Thank you both.
Sybil -
Thanks for your comment on the extension/phase-out idea. I find this credit quite logical. Phasing it out over the rest of the REO clearance sale seems extremely logical.
Unfortunately, Congress doesn't always rarely operates on logic. The current tax credit was adopted against the true political will of many members of that body. It was not the brain child of the leadership of either party. I was not a part of Obama's not-so-grand overall strategy. I was included in that over-all program only at the last minute - because it was so popular and was about to pass on it's own. (It was the good work of one Senator Izakson (R-GA), a former broker).
Please remember that the Congressional cast of characters who brought us the policies that created the boom, then bust, are still there. If they pass any extension it will only be because they think it worked and they think the future foreclosure wave will wash us all away if they don't act. Neither party in the Congress wants to reduce federal revenues - though for widely different reasons.
Having a well-thought out plan about anything is not the forte of Congress.
Homer -
Like your area, our local unemployment is over 10%. In fact, the last I read, it's over 13% - some of the highest in the country - except for Detroit and other "special" cases.
I right wrote this post with such certainly (that I knew enough about the national scene to do so) because I have seen many comments like yours here on ActiveRAIN. I also say the things I do because I, perhaps alone among agents/brokers here, have studied what's happening by price/square footage range in this market. We have very little inventory at the low end. That is were our buyers are. We have a year (city) to three years (rural/outlying cities) of inventory for homes above 2000 square feet.
We are a long way from the end. If this credit is not extended we will slide again.
Fernando, Karen -
I am a former GOP leader here. I am truly no fan of big government. I advocate such a plan ONLY because I see no safe way out of this government-caused mess.
Jim, I am with you, these are extraordinary times. I believe in the tax credit extension, and I wouldn't mind if it was available to all buyers as it looks like there is support for that. i out of 2 buyers right now are first timers. The credit cannot go on indefinitely, but I think more rounds of misery are coming with or without it. I would rather live with it.
Todd -
I read your earlier post. I see others out there in the RAIN, too. We need to continue to talk this up. The government truly needs a plan. Unfortunately, Congress is usually just trying to figure out how to get re-elected. That's usually as far as their vision extends.
Glad you are coming Monday. Turns out Tuesday would not be as good for me as I thought.
Nice post, Jim. First, I am in disagreement over the cause and the effect. Government was led by the nose by corporate lobbyists to allow those MBA's to make profit were there was none (IMHO). Second, our national organization (NAR) pushed this rebate program as a fix to the problems they helped create. Third, the program has done NOTHING for home sales in my area. The program that has helped me sell homes is the FHA loans (government) of 3.5% down and seller concessions for closing costs. Because no one seems to have any money to buy or qualify otherwise. Fourth, the index you provide needs to be tied to another more meaningful index - WAGES.
It is my opinion that the tax credit has just slowed the fall of house prices. The small gain in June and July is just a small adjustment (blip) in the continued fall of prices. I would guess that the true value line will rest some where between 100 and 120. Why did we have a blip? Most likely, because of the banks control of putting REO homes on the market.
Here is my question for you to ponder; If Greenspan saw the bubble and called it "irrational exuberance", why didn't he raise the interest rates then?
Jeff -
I've seen a lot of analysis on AR about how expensive "each incremental home sale" resulting form the sale is.
Most of that comes from the highly questionable reporting from Zillow on this subject. I don't have time today to get into a direct rebuttal to their methodology. Maybe next week in another post.
But for right now: They took what (their fine print admits) was a non-random sample of what the whole pool of renters in the country think they are going to do about home-buying next year and drew a lot of highly questionable conclusions.
I find their analysis to be as unreliable as their Zestimates (they admit a mean error of 10% on those) only more so.
From those same sources I do not see a lot analysis as to the impact the credit has had in the trickle-up market. That is: each of the sellers turning their homes over to my "first-time" buyers went out and bought another. (We have far fewer REO's and short sales here than in many areas.) But even in high foreclosure markets, the credit has helped clear away an inventory that must be cleared.
That is so, not just for the sake of REALTORS or for housing generally, but for the sake of a continued recovery from the recession.
The $44,000 (or $60,000) per extra sale calculation does not consider those ripple effects of the credit. It is a very facile argument.
Brad and Angela -
I do not support an expansion of the credit. I think "first-time buyers" and the low end is where the targeting needs to be. I definitely want this credit ended - in a rationale fashion. Ending it in any November was truly dumb.
John M -
The incremental cost of each additional sale is high. But the benefit goes beyond that individual sale so the analysis I've seen regarding that does not go far enough.
If you look closely at my graph above you can see that prices have fallen a long way already. In the case of Portland (and several other Case-Shiller cities), they are now where they "would have been" had the boom and bust not have occurred.
I feel like this recession has exacted far too much pain already. I'm not into "pain that must come". This pain came from several aspects of our economy that were/are not helpful. But it is clearly the responsibility of Congress to fix what their drumbeat of "increasing home ownership" (coming from both parties and two administrations) brought to us.
Marney, Brian -
Thanks for your comments.
Now, even here in the left coast time zone, it's time to get to work.
Joe P -
I agree that the credit must be allowed to expire but there will plenety of additional misery even if it is extended.
Gregory -
Oh, Congress had a lot of accomplices (including NAR (i.e. us)) in bringing about the bust. But they are responsible for fixing it.
The loan program you mention has had a great impact. It needs to continue. But so does the credit...because there are quite enough negative factors at work in the market.
The true "value line" varies widely across the country. Some Case-Shiller cities are now higher than others relative to 2000 values. Washington, the seat of government employment has been barely affected. New York and especially Boston are sitting pretty. The sun belt has crashed well below any fair idea of what the right price levels should be..given wages or any other consideration.
If you look at the 22-year trend line of the Portland graph above, you will see that prices have NOW returned to that trend line. That is true in other C-S cities as well.
RE Greenspan: It was "irrational exuberance" for the world to treat him as god. He was not even a prophet. His humility these days is refreshing.
As a home inspector, I'm all for extending the tax credit. It's been of great help clearing out the inventory here, and that means that I've been doing home inspections!
Russel -
Thanks for re-mentioning the ripple effect.
Good graph and information and maybe it should be phased out but all this gift giving from the got just creates a mentality that seems to never end as to where is mine
I really like the idea of phasing out the credit. That will keep buyers from stopping dead in their tracks a la the cash for clunkers program, and reduce over time as the market improves.
I like your idea. I personally am NOT seeing buyers buyer just because of this credit. It is a bonus for sure, but our phone is NOT ringing just to get the credit. It's people we already have in the pipeline who are jumping off the fence finally to get the credit.
Your own numbers stated above support the tax credit cosint $45,000 per additional sale that owuld only happen with the tax credit. That is a REALLY steep price to pay to get an entry level home sold.. especially one that is coming from a bank or other institution and NOT sending a move-up buyer into the market.
Gene -
I'm not keen on giving by the government just for the sake of giving. But in this case I do support spending for the sake of fixing.
Christianne -
What a terrific name you have!
They should never have put the Nov 30 date on this credit to begin with.
Erica -
To repeat a previous thought: It is buyers at the margin of the market that determine price. The whole nation has a vested interest in bringing the downturn in home prices to a halt.
Lane -
It is a steep price. But the economy's slide is exacting a severe price in terms of harm to people's lives.
Yes, some of the first-time buyers are buying REO's and there is no seller directly buying up. But that REO inventory must be eliminated somehow and the quicker the better.
If you say that you are going to give something away for a specific period of time... and then instead of honoring that time, choose to do it indefinitely, what message does that send? Why should people have a sense of urgency to get something done?
If Congress had been thinking they would not have ended this in any November. Spring would be better in most markets. I'm not recommending they extend this indefinitely, just:
$8000 until Spring, 2010.
$6000 until Spring, 2011.
$3000 until Spring, 2012.
The sense of urgency would be built in.
The REO inventory will not be cleared out until at least late in this period.
This credit would not be needed again until the next "worst recession since the Great Depression".
Sorry... Worst Recession since the one that Carter brought about... And buying people off to get a house for 3 1/2 years isn't really creating urgency.
Lane -
We're going to have to agree to disagree on this one.