Does the homebuyer’s tax credit matter?

Last week, President Obama signed into law an extension of the $8,000 first-time homebuyers’ tax credit, and expanded it to include a $6,500 credit for relatively-new homeowners and widened the income parameters for elligible participants in the program. This morning, Maryland home sales numbers came out, and the Real Estate Wonk, over at our friendly competipaper, The Sun, has the dirt:

Home sales last month increased a dizzying 36 percent over last year in the Baltimore metro area, according to numbers released Tuesday morning.

The unusually large pickup in activity represents deals that closed in October but in most cases were agreed to in the summer, as first-time buyers were staring down a Nov. 30 deadline to get in the door if they wanted an $8,000 federal tax credit. Last week, the tax credit was extended into next year and joined by a $6,500 credit for certain repeat buyers.

The connection between the credit and the sales figures is not attributed to any statistics, but the link/headline on the Sun’s website is catchy: “Homebuyer tax credit boosts area home sales 36% in Oct.”

Not so fast, says the Wall Street Journal. On Tuesday, the same day the Maryland sales numbers came out, housing reporter Nick Timiraos wrote this, which basically says that a recent Deutsche Bank study of the impact of the credit proves that the impact of the credit is all psychological, because in markets battered by foreclosures, no amount of tax incentives can induce people to buy, and because of disparities in home prices across the country. The report even goes after language (“dizzying”) used by reporters such as The Wonk:

The report notes that while the tax credit hasn’t created the boost for home sales that “some euphoric headlines would imply,” analysts “can’t dispute that it has been meaningful in bolstering consumer psychology and general housing market sentiment.”

The report concludes: “While the actual impact on sales numbers may be relatively light, the impact on consumer psychology, and that second-order impact on the housing market, could be meaningful, and should serve to take a worst-case scenario off the table, at least over the next several months.”

The impact of the credit is also likely to have uneven results geographically: an $8,000 credit in Cleveland, for example, offers buyers around 9.8% off of the median home price, while the same credit only goes for around 1.7% of the price in Honolulu.

In other markets, a glut of bank-owned property may offset any demand stimulated by the credit, including Miami and Fort Myers, Fla., where more than one-third of homes are in some stage of foreclosure: “Because this particularly policy tool is a blunt instrument, its application will be uneven when applied to different markets that have very different home price levels and degrees of economic stress.”

I think the way to settle this point would probably be to pull numbers on how many Maryland homeowners applied for the credit in October. So I called Jim Dupree, an IRS spokesman in Baltimore who tends to know about these things, but he wasn’t immediately available.

But actually, knowing how many homebuyers applied for the credit in October wouldn’t even really provide much of a definitive answer on this question, because the credit can be applied retroactively. They have to apply before the end of the year to get it on their 2009 tax returns, obviously, but homeowners who bought in June can still apply for the credit today.

Honestly, on a month-to-month basis, I don’t really think there’s any way you can establish that it was the homebuyers’ credit stimulating home sales. Year over year, if you compare total home sales with total credit applications, that might yield something, and perhaps anecdotally one might find that Realtors are having a lot of conversations with buyers about the credit, but as far as we know, it’s still an open question, and frankly, I think it’s a tad risky to credit the lawmakers who conceived and passed the bills with a housing turnaround just yet. What do you think?

One thought on “Does the homebuyer’s tax credit matter?

  1. Well, since my good name is on the line … :-)

    The 36 percent year-over-year increase in sales is the largest in the Baltimore metro area since MRIS began tracking the market in the late ’90s. (I’m reporting that in the Sun’s story for tomorrow.) Considering that sales here were falling until after the ’09 version of the credit went into effect (the one you don’t have to pay back), that’s pretty strong anecdotal evidence. All the economists, real estate agents and other market watchers I’ve talked to have said nothing can explain this level of increase except the credit.

    But whether that’s good for the market is another matter. Credit critics say the program is merely encouraging people to buy now rather than later — future demand that we therefore won’t see in the future.

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