Mortgage Applications Surge as Homebuyers Seek to Benefit from Tax Credit
Higher interest rates and the end of the tax credit imply lower future house prices.
DEAN BAKER, CEPR
The Mortgage Bankers Association (MBA) reported that its purchase mortgage applications index jumped 13.2 percent last week to its highest level since February. This is likely attributable to a last ditch effort by homebuyers to close on a house before the $8,000 first-time homebuyers tax credit is scheduled to expire at the end of November. Given the lead-time between contracting and closing (the credit depends on the date of closing), we are approaching the end of the period in which a contract can be expected to close in time to qualify for the credit.
Low interest rates were also a factor pushing demand last week. The interest rate on 30-year mortgages averaged 4.89 percent according to the MBA. This is the third consecutive week that it was below 5 percent. The low mortgage rates also led to a surge in applications for refinancing. This index was up 18.2 percent from the prior week.
With Congress debating a renewal of the first-time buyers credit, it is worth noting its likely impact on the market. According to several estimates, it will lead to close to 350,000 additional home purchases by the time it expires. It presumably also had a substantial impact on stabilizing house prices.
According the National Association of Realtors, 40 percent of buyers are now first-time buyers, most of whom are eligible for the credit. In principle these people would be willing to pay $8,000 more for a home than they would have been willing to pay without the credit. This is 4.7 percent of the median house price for an existing home. If just half of the credit was reflected in higher house prices, it would mean that the median house price is 2.4 percent higher than it would be in the absence of the credit. This, alone, would go far toward stabilizing house prices. Of course the extraordinarily low interest rates available at present are also a factor lifting house prices.
This raises the issue of what happens to house prices when interest rates return to normal and the credit eventually expires (even if the credit is extended beyond November, presumably Congress will not always support taxing the general population to give people $8,000 to buy a home). It is likely at that point that house prices will decline further, presumably completing the deflation of the bubble. This could mean that many of the people who buy homes in the current market are likely to sell them at a substantial loss (after adjusting for inflation). Temporarily propping up house prices, so that a new set of homebuyers can incur losses, is a policy of questionable merit.
The extension of the tax credit is likely to have limited impact in boosting sales in the future largely because it has been relatively successful in pulling demand forward. Most of the people who bought homes because of the credit would have otherwise bought homes in 2010 or even 2011. Because they bought a home this year, they will not be in the market in future years. Therefore, the pool of potential first-time homebuyers is much lower today than it was last February.
Whether or not the credit is extended, the outlook for the market in the near future is almost certain to darken. The number of mortgage delinquencies continues to rise. With the economy continuing to lose jobs and many homeowners having exhausted their savings and their unemployment benefits, there will certainly be more distressed sales in the future. In addition, it seems unlikely that interest rates will remain at the extraordinarily low levels that they have been at in recent months. We are approaching the end of the period in which the Fed has committed to buy mortgage-backed securities, so unless they extend their purchases, mortgage rates will almost certainly be rising in the next few months. In short, there are many factors suggesting that the housing market will weaken with more supply and weakened demand. There is really nothing pointing in the opposite direction.
-- October 7, 2009
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Officials at the National Association of Home Builders are confident that the first-time home-buyer tax credit will live beyond its looming expiration, though it remains unclear whether it will be expanded to include all home buyers.
Any such deal would be good news for the nation's fragile housing market, which is struggling to recover as unemployment remains stubbornly high - a problem only fueling the foreclosure crisis.
The federal government is dangling a credit of up to $8,000 for first-timers closing before Nov. 30, an offer the NAHB says has been responsible for more than 200,000 additional home sales since January. Home builders and real-estate agents report a flurry of deals as buyers rush to take advantage - whittling bloated inventory in some markets - while shares of home-building companies have risen recently as investors anticipate an extension.
Jerry Howard, president and chief executive of the Washington-based trade group that has lobbied feverishly for the extension, told Dow Jones Newswires he feels more optimistic "than any tax provision I've ever done" in more than two decades as a lobbyist. He said he didn't know when an extension, for which he sees bipartisan government support, could be final.
Wednesday, Howard said he didn't know whether the income limits, which currently phase out for individuals earning more than $75,000 a year and $150,000 for couples, will be boosted, or if it could be extended beyond first-time purchasers, a move that would likely increase sales of higher-priced units. Extending the credit for another year and making it available to all buyers - excluding investors and vacation-home purchasers - would spark an additional 383,000 home sales, the NAHB estimates.
But this comes with a price: A U.S. Senate measure to extend and expand the credit to all buyers through June 30 would cost $16.7 billion, congressional analysts said recently. The NAHB's figure for one year tops $30 billion.
That's one reason why not everyone favors keeping it going. Critics say the government is spending billions of dollars to artificially inflate home prices. They also complain that some of the deals came from buyers who would have purchased anyway and the program pulled demand from the future.
"The whole point is, by definition, it's supposed to be a temporary program," said Christopher Thornberg, principal at Beacon Economics, a Los Angeles-based research firm. "Why should the taxpayers be picking up the cost of buying a home?"
buyerDan
While this may become an eventuality, the current predictions are posturing more than anything, by lobbyists who have only this issue left to keep them busy for many lonely years to come. There is much debate in Washington among Dems that even this may have been too far a lifeline to throw. ie. a TEMPORARY program
The residential market has got years to go if that's their definition of temporary!
Thanks.
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