MarketWatchTax credit for first-time buyers giving little boost to housingMonday November 10, 12:14 pm ET By Amy Hoak
Even with bigger incentive, economic worries could be tough to overcome
ORLANDO, Fla. (MarketWatch) -- Over the summer, many in the housing industry applauded the temporary first-time home buyer tax credits written into the Housing and Economic Recovery Act of 2008. But apparently buyers weren't as impressed.
The tax credit gives first-time home buyers up to a $7,500 credit for buying a home between April 8, 2008, and July 1, 2009. Realtors say it hasn't been effective in getting people to buy homes, which would reduce the excessive inventory on the market.
The problem, they say, is that buyers are turned off by the repayment requirement of the credit. The credit needs to be paid back over a 15-year period, beginning on a buyer's 2010 tax return. In effect, it's really an interest-free loan.
"For the economist, even with the repayment feature, it was a clear benefit. Money today is better than money tomorrow. You receive the money today, put the money in the bank, earn interest, and pay it off over time," said Lawrence Yun, chief economist for the National Association of Realtors.
"It was a clear benefit, but nonetheless, the average Joe Homebuyer does not see it that way," he said, speaking at NAR's annual conference, held in Orlando over the weekend. The conference concludes on Monday.
To entice more first-time buyers, the industry group is lobbying lawmakers to tweak the tax credit, removing the repayment aspect. They also want all home buyers to be eligible -- not only those who haven't been homeowners for the past few years.
The National Association of Home Builders is suggesting an even heftier incentive. It wants a 10% home-buyer credit, up to $22,000, depending on the Federal Housing Administration loan limit in the market, according to a NAHB news release. It also wants that credit to be available to all home buyers who make a purchase in the next year, and for the repayment feature to be removed.
Yun said that $7,500 is a substantial amount of money in moderately-priced markets like those in the Midwest, yet home sales aren't really picking up there.
Economy trumps incentivesBut it's clear that buyers have more on their minds than tax credits these days. Fears about the overall economy and job security are holding back many Americans who might otherwise buy a home.
Forty-one percent of those who are interested in purchasing a home said that overall economic conditions were holding them back, according to survey results released on Monday by Move Inc., the company that operates Realtor.com. The poll was conducted in mid-October.
Another telling response: When asked about the top housing priority for the new president, participants were most concerned about foreclosure prevention.
Half of the 1,000 people polled say that President-elect Barack Obama's No. 1 housing priority during his first 100 days in office should be to help struggling homeowners avoid foreclosure, according to the survey. Read more on housing's prospects in Obama's administration.
On this, NAR also says more can be done and that objectives of the government's $700 billion rescue package haven't been realized.
"The idea was to essentially stabilize the banking system with the thought that it would trickle down into Main Street. Fast forward to today, it's really not trickled down," said Jerry Giovaniello, the Realtors' chief lobbyist.
In the Move survey, other housing issues took less focus. About 23% of participants said that making more affordable credit available should be the top housing priority for the next president, and only 16% said the same about assistance for first-time home buyers.
Affordability improvesBut there's a reason for all this industry attention to first-time buyers; their purchases allow current homeowners to sell their homes and move as well. More first-time home buyers in the market would start a chain reaction to reduce high inventories of for-sale properties, which has been putting downward pressure on housing prices.
Already, first-time buyers are making up a larger share of all home buyers, due to improvements in affordability but also the difficulty that current homeowners are having in selling their homes. With fewer home sales overall, first-time buyers account for a larger piece of the pie.
Between July 2007 and June 2008 41% of all buyers were first-time buyers, up from 39% the year before, according to the NAR's Profile of Home Buyers and Sellers, released at the conference. The survey involved 133,000 home buyers and sellers throughout the country.
But while tumbling housing prices have increased affordability, that wasn't the biggest reason these buyers made a purchase. Fifty-two percent of first-time buyers said it was just the right time for them to buy a home, 16% said it was the best time to buy because of the affordability of homes and 8% said it was the best time because of the availability of homes for sale.
Only 3% of people who bought for the first time wish they would have waited.
Still, there were discounts to be found, according to the report. Consider the following:
Seventeen percent of all sellers surveyed said that they sold for less than 90% of their asking price. Twenty-one percent of sellers said they sold for between 90% and 94% of their asking price, and 38% said they sold for 95% to 99% of their asking price.
Sixty percent of sellers said they had to cut their asking price at least one time before they were able to sell their property.
The percentage of all buyers who purchased a home in foreclosure rose to 6%, up from 1% in last year's survey. About 38% considered buying a foreclosure, but didn't because they couldn't find one that met their needs.
Lately, some of the markets that have been getting the most attention from all buyers are those that have suffered the most severe price declines, according to search data from Realtor.com.
"Where search increases were the greatest, they tended to be clustered in markets which had seen price reductions. So top markets were Stockton, Calif., Naples, Fla., Detroit, the metro D.C. area and so on," said Errol Samuelson, president of Realtor.com.
Financing issuesIt's worth noting that the window of time that the Profile of Home Buyers and Sellers covers mutes some of the financing challenges that people had as the year-long time frame went on.
For example, 34% of first-time home buyers in the survey said they financed the entire purchase price, but no-down payment loans became virtually nonexistent by the end of the survey, Yun said. Last year, 45% said they put no money down.
Plus, down-payment assistance programs such as those available through The Nehemiah Corporation of America are no longer available to buyers as of Oct. 1. In fact, some advocates for down payment assistance believe that the deadline for that assistance was a factor that helped home sales to rise in September.
"Some may be misinterpreting the spike in September home sales to be a potential turning point in the housing and financial crises," said Scott Syphax, president and CEO of Nehemiah, in a news release. "Driving this increase was the swell in demand for down-payment assistance by American families scrambling to take advantage of these programs before the October 1st ban."