Extending the $8,000 first-time homebuyer tax credit is one government stimulus policy that makes sense. Nationwide, about twenty percent of first-time home purchases during 2009 were directly related to the tax credit. Even though real estate in San Diego is particularly expensive, the tax credit has enticed thousands of home buyers who were on the fence to commit to making a purchase. The policy is succeeding where so many other stimulus measures have failed.
Home prices have turned a corner in the past six months. Instead of double-digit declines in property values, most housing markets have seen month-to-month increases since early summer. On an annualized basis, San Diego home values are now approaching positive territory in many neighborhoods for the first time since 2005. The increases aren’t large in percentage terms, but it is a huge psychological barrier for home buyers. No one wants to buy a home while values are dropping.
San Diego home buyers have been scrambling to get into escrow on a home purchase before the end of October, anticipating expiration of the tax credit on November 30, 2009. San Diego real estate professionals get the definite impression that demand from first-time home buyers could suddenly dry up on November 1 if the tax credit is not extended.
Although $8,000 is less than three percent of the median price of most San Diego homes, $8,000 is enough to cover closing costs for most purchases. The tax credit is seen as a chance to buy a home in San Diego with little or no money down. At today’s prices, the monthly payment on many homes in San Diego is just about on par with rental rates. So with no closing costs, first-time home buyers are able to justify buying instead of renting. Add $8,000 and the purchase becomes less appealing. It is like night and day for some people who currently rent.
Today Treasury Secretary Geithner and Housing Secretary Donovan said that the Obama administration wants to see the tax credit extended for a “limited period.” An extension through April 2010 has maximum support. However, Senator Max Baucus has proposed an amendment to keep the full $8,000 tax deduction through April, then gradually phase it out by $2,000 per quarter through the end of 2010.
The Baucus amendment makes a lot of sense. With a sudden elimination of the tax credit, many home buyers will simply decide that they’ve missed their opportunity to buy. A sudden drop in demand could easily turn the modest real estate price appreciation into further declines. A gradual phase-out would soften the impact and continue to entice some first-time buyers who would otherwise continue to rent.
The Senate has also proposed a $6,500 homebuyer tax credit to existing home owners who have lived in their homes for at least 5 years. There is less need for this additional provision. $6,500 is not likely to entice current owners to sell homes in San Diego, either to move up or to downsize. Home sellers traditionally have equity in their homes when they sell. If they have equity they will use it as a downpayment on their next home. If there is no equity, then the home seller will be in short sale or foreclosure. People who go through short sales and foreclosures have damaged credit, so they are not able to turn around and buy another home. If the point is to stimulate home purchases, then any tax credits extended beyond first-time home buyers should be available to anyone who purchases a home, regardless of whether they have recently owned a home.
Overall, the Senate has the right idea. Unlike TARP, the homebuyer tax credit has made a noticeable difference. Let’s hope for smooth passage.