Jay Thompson, Real Estate Blogging Rockstar has a brilliant (as usual) post today. Jay asked the question “Will the Homebuyer tax credit return? Should it?”
It might surprise some that I don’t think it should. I am for select government intervention. I am for select forms of stimulus. I am for bread on my own table. But I don’t think the tax credit is the right route for aiding the recently sorrowful market.
In our market, the first wave of the credit did draw down inventories beautifully. We had active listing inventories down to a number within 1% of January 1, 2006 on January 1, 2010. But since that time we’ve had a 53% increase in listings. The first wave worked; the 2nd wave created a false excitement / illusion of success that undid all the good of the first wave.
The credit here essentially worked too well. It gave sellers the perception that selling was easy again, or at least getting easy. Because the market had returned to balance (we were at just over 6 months of inventory January 1st) sellers voluntarily came rushing back into the market who had sat on the sideline, that “other shadow inventory”. Some of this was logical: the chance of a seller successfully selling was 47% in 2007 and 2008 in our market. Last year ended at 53.6%. That isn’t a 6.6% gain… that’s a 14% gain in probability. Last year’s uptick in probability of sale must be seen as the motivation behind so many sellers electing to return to the market this year. But now… through July of this year, the odds of a home selling were at only 44%. The tax credit can be applauded for the first improvement and ridiculed for the later developments.
Giving people cash doesn’t help them make good decisions. The savings on a $200,000 loan at 4.25% versus 5.25% are $43,000 over the life of a 30 year loan; in other words, the mortgage market today provides a buying opportunity that is significantly better than last year. The value of 30 year interest savings if 5 times that of the tax credit. The monthly payment difference is 8 – 11% lower now than it was one year ago. There is more inventory to choose from. But it is so much easier for a consumer to think short-term and “get $8000 with tax return”.
One of the major costs of market tinkering is the sacrifice of trust and good will. NAR lobbied relentlessly for the tax credits (including requests for the tax credit to be $15,000, not $8000) and real estate agents and mortgage brokers insisted that rates would skyrocket later this year once the Feds stopped buying treasuries. “Better lock in now, because rates will be at 6% by year’s end” stimulated the March/April rush on the market, the premature buying panic that got people in a.) under the tax credit deadline but also b.) ahead of the presumed upward trend on interest rates. Well rates today are six tenths of a percent LOWER, not higher than they were in the Spring. I tremble to think what future goodwill could be traded for more short-term spikes in sales due to renewed lobbying efforts. It is all reminiscent of “buy now or be priced out of the market forever”, another notorious industry statement from 2005.
A concerted effort among brokers to properly educate their clients and consumers on home-ownership and personal finance WILL NOT remedy the market quickly (because that’s all we’re interested in these days, isn’t it, the quick fix?); but it would go great lengths to helping the market make a durable and sustainable recovery. It would help restore some semblance of professionalism. It would increase the individual broker’s permission asset. We can look to the outside for help… or alternately… we in the biz can be the help ourselves.
Each month when I publish the Stat Pack, I start with “The Rules”. The Rules…don’t…change. Here they are:
LOCATION, LOCATION, LOCATION
MONEY IS MADE ON THE BUY
SELLERS SET ASKING PRICES; BUYERS DETERMINE VALUE
BUYERS BUY VALUE
THOSE WITH POWER HAVE FEW NEEDS. THOSE WITH NEEDS HAVE LITTLE POWER
THE HARDEST THING TO GAIN IS TRUST; THE EASIEST THING TO LOSE IS TRUST
REPUTATION AND ETHICS ARE VALUE-ENHANCING ATTRIBUTES
THE BEST NEGOTIATING POSITION: WINS
A new tax credit doesn’t necessarily violate the rules… but you’re supposed to eat your dinner before your cake, and the tax credit is just the butter-cream icing on top of the cake. Better butter-cream doesn’t make anyone, or anything, any healthier.