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Driveby Economics – $8,000 Price Cut?

I had coffee yesterday with a long time friend of mine who works for a local title company.   We were talking about a variety of things, including some of the new stuff I’m working on on the web.

The topic came around to the $8,000 First Time Home Buyer Tax Credit.   He said to me that he’s had 3 different Realtors tell him that on December 1, the value of all of their listings is going to drop by $8,000 each.

Let me say that again, on December 1, each of the houses that they have listed is going to drop in value by $8,000.   Why’s that?   Because the first time buyer credit is going away.

Now let’s look at a couple of things (according to this story):

  • It’s called a FIRST TIME HOME BUYER tax credit.
  • According to these Realtors, it has inflated (or kept up) the prices of homes by $8,000.  So does the buyer benefit or does the seller?
  • Somewhere less than 50% (according to the last stats I’ve heard) of the buyers qualify for the tax credit.
  • But 100% of the buyers are paying paying $8,000 more.
  • And the government is paying $43,000 for every additional sale we’re getting.

Now, do you really think that it’s such a good idea any more?

Oh, and in reality, the prices of the homes aren’t going to wait until December 1 to drop.   Realistically, if you haven’t signed a purchase agreement by Halloween, it’s going to be very difficult (but not impossible) to get the deal closed by the end of November.

All is not as simple as it seems.

Tom Vanderwell
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Related posts:
  • More thrilling real estate math from the National Association of Realtors: How much did first-time home-buyers benefit from their $8,000 tax-funded subsidy? Can you count to negative $15,000?
  • If you’re game…
  • FHA and the $8000 Tax Credit – what I know and what I don’t….

  • 18 comments

    18 Comments so far

    1. Steve Holben October 22nd, 2009 11:17 am

      The $8K “credit” will have the same impact on the price range of homes it attracts similar to the effect cash for clunkers did on the car industry. Time and the human condition has proven again, and again,and again ad infinitum that Keynesian economics does not work with any degree of long term reliability. Only a financially responsible government and a free market economy always prove the correct course for the long run. I’d be happy to discuss this with anyone. I’m @ 303-758-4272.

    2. James Boyer October 22nd, 2009 3:38 pm

      I have 4 starter type homes closing over the next 35 days and only one of them is getting the $8000 home buyer credit. It has been my experience this late summer and fall that the home buyer credit did not really excite that many would be home buyers in North East New Jersey.

    3. Tom Vanderwell October 22nd, 2009 3:58 pm

      James – I had a local Realtor describe first time buyers as “crack addicts looking for their next hit of coke.” They were a big time spike here and I think a lot of them will regret it later.

      Steve – I nominate you for the oxymoron statement of the day – “Financially responsible government.” That’s a good one!

      Tom

    4. Barry Bevis October 22nd, 2009 4:49 pm

      Well Even though I don’t think its “responsible government” its working here.
      I have Eight closings between now and the end of November.
      Seven qualify for the tax credit. Of the Seven, Six are in the market because of the Tax credit.

      I don’t think home prices will drop $8000 next month but I do think the first timers will be out of the market. Combine that with the normal fall slow down and I expect it to be very quiet for the next few months!

    5. Kevin Pellatiro October 22nd, 2009 5:18 pm

      This continues to strike me as convenient counter-culture opinion. To be fair, it seems to have more and more merit the closer we get to the end of the incentive. Still, the first time homebuyers seem more intent on using the $8,000 as benefit after closing (do it yourself upgrades, hardwood flooring, updates, etc), rather than at closing or as some quasi-reduction of their purchase price.

      We are working in real, live (hopefully live*ly*) markets every day. Your experiences are the reality, not news outlets and their postive or negative conjecture. Are you seeing your clients throw up their hands and just give away the $8,000 in negotiations?

    6. Tom Vanderwell October 22nd, 2009 5:41 pm

      Kevin,

      I don’t think it’s so much that they are “giving away the $8K in negotiations” but let me try another scenario on you that makes more sense.

      The first time buyer market picks and suddenly the houses where the average time on the market was 8 months has dropped and now it’s 2 months on the market. Average price has turned around and now is up 4% in the last 90 days. Multiple offers is becoming the norm rather than the rare non-event.

      What does that do? It raises the price of the homes in the area because of the increased demand and that’s where the $8,000 goes. Sellers are able to sell their houses for more money than they would have if the first time buyer market was not “jump started.” That’s where the $8,000 is going.

      Does that make sense?

      Tom

    7. Ashlee October 22nd, 2009 6:46 pm

      Of all the buyers that I am currently working, 7 to be exact, only 2 qualify for the tax credit. I dont really think in the TX market that the prices will be affected after the tax credit goes away.

    8. Erion Shehaj October 22nd, 2009 8:53 pm

      What’s the math behind the government spending $43k for each sale involving the tax credit?

    9. Russell Shaw October 22nd, 2009 9:42 pm

      Tom,

      If I can get *ten* different Realtors to say that prices won’t drop by 8k because of the tax incentive going away would that statement then become a fact?

    10. Tom Vanderwell October 23rd, 2009 5:48 am

      Russell,

      Nope, absolutely not. If you look at the post on Straight Talk where I started doing some of these “driveby economics” posts, then you’d see that I was very blunt about the fact that these weren’t solid economic theories, they were anecdotal insights into the market.

      But of course, if all you read of my writing is here, you wouldn’t have known that.

      http://straighttalkaboutmortgages.com/2009/09/30/driveby-economics-a-new-feature-on-straight-talk/

      Thanks for raising the point though. I appreciate it!

      Tom

    11. Tom Vanderwell October 23rd, 2009 6:01 am

      Erion,

      Here’s the math according to the National Association of Realtors. They are estimating that 1.8 to 2.1 million homebuyers will take advantage of the First Time Home Buyer tax credit.

      Of the 1.8 to 2.1 million, approximately 330,000 of them would not have bought if the tax credit didn’t exist. (NAR’s numbers – I don’t know how they calculated or estimated that).

      So we have 1.8 million x $8,000 = 14,400,000,000

      $14,400,000,000/330,000 = $43,636 per additional sale.

      Does that make sense?

      Tom

    12. Erion Shehaj October 23rd, 2009 8:15 am

      Your explanation does. That NAR theory, not so much. I’d say it is pretty damn impossible to know how many more people got in a house buying mood because of the tax credit without having an 80% sampling error.

    13. Liz Voss October 23rd, 2009 2:11 pm

      They need to drop the $8k credit. Now they’re starting to discover all the fraud that is happening within the program and once again, who ends up paying for it.

    14. jim October 23rd, 2009 6:32 pm

      Tom, that calculation is VERY flawed. What people said they would or wouldn’t do is hardly a scientific study.

      It’s very stupid of NAR to even release such a stupid statement at a time when they’re trying to lobby for an extension.

      I bet there are probably many more who were on the fence about buying, and probably would have bought at some point soon, but the credit motivated them to buy NOW, instead of 5 months from now.

      All it did was prop up the markets a bit longer and prevented further price drops and foreclosures, which through a long ripple effect causes more problems. I’d let the tax credit expire for 6 months and see what happens.

    15. Mike Carpino October 23rd, 2009 6:32 pm

      I live the Lake Norman area of Charlotte North Carolina and the $8000 tax credit has not brought out many buyers in my market either. Clients are looking for good deals regardless of the $8000.

    16. jim October 23rd, 2009 6:34 pm

      Tom, that calculation is VERY flawed. What people said they would or wouldn’t do is hardly a scientific study.

      It’s very stupid of NAR to even release such a stupid statement at a time when they’re trying to lobby for an extension.

      I bet there are probably many more who were on the fence about buying, and probably would have bought at some point soon, but the credit motivated them to buy NOW, instead of 5 months from now. The people who couldn’t even afford a home without the credit shouldn’t be buying to begin with.

      All it did was prop up the markets a bit longer and prevented further price drops and foreclosures, which through a long ripple effect causes more problems. I’d let the tax credit expire for 6 months and see what happens.

    17. Tom Vanderwell October 23rd, 2009 8:18 pm

      Jim,

      I’ll be honest with you, I haven’t read up on what criteria the National Association of Realtors used to determine whether someone actually “moved off the fence” because of the tax credit.

      But let’s say they underestimated it by say 100%. Not a statistically insignificant number, but something similar to their prognostications on many other real estate statistics. Let’s say that rather than 334,000 new sales because of it, there were 668,000 new sales.

      That still means that we would have paid $21,818 for every new sale.

      It’s still poor economic policy.

      Tom

    18. Steve Norris October 24th, 2009 5:47 pm

      It’s poor economic policy because, in the long run, this legal theft of $14.4 billion from all those who don’t get the $8,000 merely got some (whatever the number)people to buy this month instead of next, or the one thereafter. And now we will not have the sales for the next several months we would have had. My 13 year old gets this… why can’t the politicos?