I am a Realtor. The Association of Realtors is pushing to extend the $8,000 tax credit into 2010, expand it to all home buyer’s and would even like to increase the credit to $15,000. I should be for this too, right?
Wrong! I feel that people making prudent investment decisions and working to accomplish their life goals is the backbone of this industry. I don’t think this tax credit is helping home buyers in Orange County. Here’s why.
Because the credit is only available to first time home buyers, and first time home buyers are typically in the market for lower priced properties this only really affects one sector of the market. These buyers are the most sensitive to price fluctuations to either be able to take advantage of home purchasing, or watch that dream slip out of reach. When I work with first time home buyers I always stress that when making an offer it is amazing how many other potential buyers you may be forcing out of the sale by every $1,000 or $2,000 dollar increase in offer price.
Since the incentive was put into effect prices have increased disproportionately to the credit. We have seen at least a solid $20,000 price increase on homes under $400,000. This is making it more difficult for people to purchase again because of an artificial price inflation. Not to mention that this difference in price is being financed, which means it will cost considerably more in interest over the life of the loan.
This credit has also created another difficult situation in Orange County. As prices rise on smaller homes, they have been falling on larger homes. For those looking to downsize they are seeing that they have to be willing to spend $20,000-$50,000 more on a smaller house and will have to take an additional loss of $50,000 or more on the sale of their current home. A disequilibrium is appearing. Rather than smoothing market demand, the credit is throwing it into turmoil.
If you are thinking of buying a home now, by all means take advantage of the credit, because it is being offered, but it seems to me that it is time to ride out whatever pain there really is in the market. Trying to continue pushing it back for another day is not the answer. We are seeing such artificial price inflation and overwhelming demand that the situation is begining to bottle-neck. The market would benefit from more homes on the market and from an end to the credit. I feel that my job is to inform people of the economic truth to the options which are highly publicized but whose effects are not.
This article published on MSNBC.com puts it very well,
“The credit also artificially inflates the value of all eligible homes sold by up to $8,000, leaving the buyer with a debt that’s greater than the value of the property. Sound familiar? Inflated home values were a big part of what got us into this mess in the first place. Perpetuating this via the tax credit might lessen the pain in the near term, but as we’ve all learned the hard way, a correction’s going to come sooner or later.”
I think this may be the most enlightening article I have read in Real Estate news in a long time. As a current homeowner you may lose value in the short term, but real estate has intrinsic value unlike many other investments. This value will be regained in the long term. It is better to suffer some now in order to build a stronger economic foundation than to continue to try to push the pain away. Take a deep breath, breathe through the pain, and let’s try to solve the real problems, not band-aid them.
