Tax Credit


Study: Tax Credit Had ‘Fleeting’ Effect on Housing Market

 

By Nick Timiraos

Bloomberg News

Critics of last year’s $8,000 tax credits for home purchases routinely argued that the credits were unlikely to do more than offer sellers the chance to boost their sale price by the amount of the tax credit.

Those critics won’t be surprised, then, by a new paper that finds—you guessed it—that average listing prices rose by around $8,000 in the month after the signing of the first major tax credit, and that they fell by slightly less than $9,000 two months after the tax credits expired.

The paper by Jonathan Brogaard and Kevin Roshak, doctoral candidates at Northwestern University’s Kellogg School of Management, found that the tax credit did little to change the quantity of homes for sale. But the researchers found that in certain markets, the tax credit had a substantial impact on prices.

Researchers looked at different types of housing markets: stable and low-cost markets were more likely to be influenced by the credit, while more expensive markets or those with more volatile prices were less likely to see an impact.

In the first class of housing markets, researchers found that homes sold for around $6,500 more than before the credit. “These price and quantity changes imply that sellers captured the credit in treatment markets,” the paper says.

While the estimates of the changes in home prices during and after the tax-credit program “are imprecise, they are also dramatic and distinct relative to other noise,” the authors write.

The paper concludes that “rather than igniting ‘animal spirits,’” the tax credit had a transitory effect. “These results suggest that the tax credits had only a fleeting influence on the housing market, resulting in little more than a redistribution of wealth,” it says.

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Celebrating America’s History of Home Ownership

The ability to buy, sell and own property has defined our nation throughout its history, and as the U.S. prepares to celebrate its 235 birthday, Americans continue to reaffirm their support of and aspirations toward home ownership.

“For over 100 years, REALTORS® have helped bring families home,” said NAR President Ron Phipps, broker-president of Phipps Realty in Warwick, R.I. “There’s a reason why home ownership is called the American Dream – it’s part of our collective history and an essential part of building our nation’s future, as well.”

Numerous studies have shown the value Americans place in home ownership. According to the 2010 NAR Profile of Home Buyers and Sellers, first-time buyers most often cite the desire to own a home as the primary reason for their recent home purchase. Eighty-five percent of all recent home buyers consider a home purchase a solid investment, and 76 percent of them believe owning a home is as good as or better than an investment in stocks.

Earlier this week, a New York Times/CBS News poll reported that nearly nine in 10 Americans say home ownership is an important part of the American Dream. In a recent National Association of Home Builders survey, 73 percent of respondents said they believe the federal government should provide tax incentives to promote home ownership.

“Owning a home has long-standing government support in this country,” said Phipps. “Historically, lawmakers have understood the value of homeownership in fostering communities, creating social stability, and building wealth over the long term. In fact, Franklin Delano Roosevelt said, ‘A nation of home owners is unconquerable.’

“The mortgage interest deduction was introduced as part of the federal tax code nearly a century ago, and the Federal Housing Administration, Federal Home Loan Banks, and Fannie Mae were all created during the worst economic crisis our country ever faced in the Great Depression.”

Studies also demonstrate tangible social benefits to home ownership. The NAR report, Social Benefits of Homeownership and Stable Housing, showed that home owners are more active in their communities, benefit from improved education opportunities, and report higher levels of self-esteem and happiness when compared to renters. The U.S. Census Bureau reports that owners do not move as frequently as renters, providing more neighborhood stability. In turn, involvement in community quality-of-life issues helps prevent crime, improve childhood education and support neighborhood upkeep.

“As families across the country gather this weekend to celebrate our nation’s birthday, REALTORS® will continue to work to insure that this and future generations have the opportunity to pursue their dreams of owning a home,” said Phipps.

Source: NAR

By Courtney Schlisserman and Bob Willis – // Sep 21, 2010 8:22 AM PT Propeller

 

Housing Starts in U.S. Increased More Than Forecast

Builders broke ground on 598,000 homes at an annual rate, up 10.5 percent and the most since April, following a 541,000 pace in July, the Commerce Department said in Washington. Photographer: Jim R. Bounds/Bloomberg

Sept. 21 (Bloomberg) — David Semmens, an economist at Standard Chartered Bank, talks about the outlook for the U.S. housing market and the need to maintain government support of the mortgage market. Semmens speaks with Deirdre Bolton and Jon Erlichman on Bloomberg Television’s “InsideTrack.” (Source: Bloomberg)

Sept. 21 (Bloomberg) — Housing starts in the U.S. increased more than forecast in August, a signal the industry is stabilizing. Builders broke ground on 598,000 homes at an annual rate, up 10.5 percent and the most since April, following a 541,000 pace in July, the Commerce Department said today in Washington. Bloomberg’s Betty Liu and Michael McKee report. (Source: Bloomberg)

Sept. 20 (Bloomberg) — Bernie Markstein, senior economist and vice president for economic forecasting and analysis at the National Association of Home Builders, talks with Bloomberg’s Melissa Long about the group’s survey showing confidence among U.S. homebuilders held at the lowest level in more than a year. The National Association of Home Builders/Wells Fargo confidence index was unchanged at 13, matching the August reading as the lowest since March 2009, data from the Washington-based group showed today. (Source: Bloomberg)

Housing starts in the U.S. increased more than forecast in August, outstripping a gain in building permits that signals residential construction will stay close to record lows.

Builders began work on 598,000 homes at an annual rate, up 10.5 percent and the most since April, the Commerce Department said today in Washington. Economists surveyed by Bloomberg News forecast a 550,000 pace. Permits, an indicator of future activity, were issued at a 569,000 rate.

Builders took out fewer applications to start single-family homes for a fifth consecutive month, signaling a jobless rate at or above 9.5 percent for the past 13 months is hurting companies such as Hovnanian Enterprises Inc. A distressed housing market is among reasons Federal Reserve policy makers meeting today will consider whether new measures are needed to boost growth.

“The housing market has found a bottom, and we’re bouncing along here,” said Thomas Simons, an economist at Jefferies Group Inc. in New York. “The market is challenged by supply, and until that is cleared out, it will be tough for the homebuilders. We also need additional job creation.”

Estimates for August starts in the Bloomberg survey of 74 economists ranged from 505,000 to 600,000 after a previously reported 546,000 a month earlier.

Builder Shares

Stocks fluctuated as declines in technology and consumer- staples companies offset a rally in homebuilders. The Standard & Poor’s 500 Index fell 0.2 percent to 1,140.60 at 11:20 a.m. in New York. The S&P Supercomposite Homebuilding Index, which includes D.R. Horton Inc. and Lennar Corp., rose 0.9 percent. The yield on the 10-year Treasury note fell to 2.67 percent from 2.70 percent late yesterday.

The gain in starts was led by a 32 percent jump in construction of multifamily units, which is often volatile. Work began on 4.3 percent more single-family houses, which accounted for 73 percent of the industry.

Similarly, the 1.8 percent increase in building permits last month reflected a gain among multifamily units, which include townhouses and apartment building. Applications for single-family projects dropped to the lowest level since April 2009.

“Even though single-family starts moved in the right direction, there is still weakness evident in the single-family data,” Daniel Silver, an economist at JPMorgan Chase & Co. in New York, said in a note to clients. “The level of starts relative to permits indicates that the growth in housing starts may not be sustained.”

Regional Breakdown

Three of four regions of the country had an increase in starts last month, led by a 34 percent surge in the West and a 22 percent gain in the Midwest.

The Fed’s policy-making Federal Open Market Committee is scheduled to announce its decision on interest rates today at about 2:15 p.m. The benchmark interest rate has been in a range of zero to 0.25 percent since December 2008.

The central bank said in its Beige Book survey of regional Fed banks earlier this month that there were “widespread signs of a deceleration” in the economy from mid-July through the end of August. Most areas of the U.S. reported “very low or declining home sales.”

Sales of new houses dropped in July to the lowest level in records dating back to 1963, figures from the Commerce Department showed last month. The government is scheduled to release August sales data on Sept. 24.

Tax Credit

Demand plunged after the deadline for signing contracts and becoming eligible for a government homebuyer credit worth as much as $8,000 lapsed on April 30. The tax incentive provided temporary relief for the industry that precipitated the recession.

Rising foreclosures depress prices and mean homes stay on the market longer, hurting builders. Home seizures reached a record in August for the third time in five months, RealtyTrac Inc. said Sept. 16.

A lack of jobs is preventing some buyers from making mortgage payments. The 13 months of unemployment at 9.5 percent or higher matches the period from mid 1982 to mid 1983 as the longest span of elevated joblessness since monthly records began in 1948.

Payrolls dropped in 36 states in August, indicating the labor market will take time to rebound, figures from the Labor Department also showed. Employers in Michigan cut 50,300 jobs last month, the biggest drop since January 2009. Texas and California rounded out the three states with the biggest job losses. Joblessness climbed in 27 states, with Nevada reaching a record 14.4 percent rate, the highest in the nation.

Obama Plans

The Obama administration has said it plans to announce proposals in the next few weeks for an emergency loan program for the unemployed to avert default, and a government mortgage refinancing effort to lower monthly mortgage payments to avoid foreclosures.

The end of the homebuyer credit, joblessness and sagging consumer confidence prompted a decline in orders at Hovnanian, the largest homebuilder in New Jersey said on Sept 1. The company said its net orders dropped 37 percent in the quarter ended July 31 from a year earlier.

“Job creation is the key to a housing recovery, which makes it difficult to predict how improvements in the economy and housing market play out,” Chief Executive Officer Ara Hovnanian said in a statement.

To contact the reporter on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.net; Bob Willis in Washington at bwillis@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

 

Housing Affordability: A Possible Good Omen

by Lawrence Yun, NAR Chief Economist

Amid all the media reports on how housing is still “in the tank,” one piece of news seemed to have escaped many of the pundits. Housing affordability could possibly reach an all-time high of near 200 in the second half of this year. That is, a household making the median income would have twice the income necessary to buy a median-priced home in America. To date, NAR’s housing affordability index reached an all-time high of 184 back in early 2009. It was only slightly above 100 during the housing bubble years, meaning that qualifying income barely met the requirements to buy a home even with a 20 percent down payment (if not using teaser-rate, funny/toxic mortgages). Historically over the past 40 years, the average affordability index was 118.

The principal reason for the expected record high housing affordability index reading is the rock bottom mortgage rates of 4.4 percent on a 30-year fixed rate. Add to that modest gains in the average wage rate, which rose 3 percent in 2009 and is up 1.2 percent this year-to-date in spite of the high unemployment rate. Consider now versus then when home prices were at their “bubble” peak in 2006.

Of course, like all things “real estate,” affordability is local as well. There will be considerable local market variations in affordability conditions. Remember that one of the main components of NAR’s affordability index is home prices. Some markets encountered only minimal price declines while others
such as Las Vegas experienced a 60 percent nose dive. Still, on a nationwide basis, the affordability conditions have risen to compelling levels.

However, if a sizable number of people view – rightly or wrongly – that home prices will fall further and raise the affordability levels to even higher levels, then homebuying will continue to remain soft. That will lead to a further build up of inventory and thus hold back a true price recovery. The price decline potential was evident in July’s housing data. Existing-home sales plunged 27 percent to 3.83 million seasonally adjusted annualized units – their lowest level since 1995. Even though there was little change in inventory (with 4 million homes available for sale), the actual months’ supply of inventory rose sharply to 12.5. The sales decline reflected the aftermath of taking the stimulus medicine away. For nearly all of June, homebuyers knew they had to close the deal by the end of June to qualify for the tax credit. Therefore – and naturally – people rushed in to close in June and not wait till July. Qualitative REALTOR® member survey data about recent homebuyers suggest that investors, all-cash buyers, and buyers of expensive homes stayed in the market in July, but first-time buyers did not.

Going forward, home prices may fall, although I doubt in any meaningful way. Even if they do decline, there is no guarantee that affordability conditions will improve. Again, the principal reason for our current exceptionally high affordability conditions is lower mortgage rates. If prices were to fall 10 percent but mortgage rates creep up to 5.4 percent, then the affordability conditions could actually worsen.

As for home sales, there are far fewer people in the pipeline to buy a home in the immediate months after the tax credit expiration. Consequently, expect continuing low sales at least through autumn. But sales should slowly come back because of the high expected affordability conditions. Winter months are generally slow ones for home sales. If sales this coming winter matches up with past “normal” winters, then it would be a good sign that the housing market is getting back on track to normal sales levels. If sales this winter remain 20 to 30 percent lower than normal, then we are looking at trouble with high inventory stuck at a double-digit months’ supply. Remember that the months-supply figure is also impacted by the raw count of homes listed for sale. Since inventory generally declines from summer to winter, the months’ supply will steadily fall, hopefully to 8 or 9 months, and close to the level consistent with continuing price stabilization. For example, inventory fell by 600,000 to 800,000 from July to December in each of the past 3 years. If a similar decline occurs this year and home sales slowly bounce back to 4.5 million (annualized sales) then we can have continuing price stabilization.

A compelling argument can be made about the best affordability conditions, but it will be for naught if consumers lack confidence. Confidence in turn will be directly impacted by the general direction of the economy. Unfortunately, the economic recovery is coming to a virtual halt. GDP growth rates in the past three successive quarters were: 5.0%, 3.7%, and 1.6%. The upcoming GDP growth rates could be even lower figures. (If it turns negative for two straight quarters, then another fresh recession is at hand). At such tepid growth rate the unemployment rate could well reach 10 percent. GDP growth in a post-recessionary environment should be 5 percent or better, not only to start growing but to compensate for the recessionary downfall.

The weak economic expansion means that the job market will continue to look bleak and the unemployment rate could top 10 percent. This does not mean the country is necessary losing jobs on net right now. There have in fact been 763,000 private sector job creations from the beginning of the year to August. The soft economic expansion just means that the job creation pace is too slow to accommodate the rise in the labor force, particularly the recent high school and college graduates looking for work, aside from the need to fully re-hire the near 8 million job losses that occurred in the 2008 and 2009 recession. In a normal good year, there would be 2.5 to 3 million annual private sector job gains.

The homebuyer tax credit appears to have done its job in preventing home price over-correction. NAR prices show stabilizing pattern for the past 12 months while Case-Shiller price data show stabilizing patter for the past 18 months. We’ll still need to wait several more months to get a definitive gauge on price stabilization. At this point, we’ll see how the housing market behaves in the absence of the stimulus medicine. As with any sectors in the economy, it is very unhealthy to be dependent on government help for a long period. Compelling affordability conditions and some job creations are a move in the right direction and we have to just allow some time for these factors to work their way into the system. But an important question that will linger is of when consumer confidence will genuinely return to close on the deal.

For the latest economic forecast insights and analysis, visit http://www.realtor.org/research/economists_outlook.

Housing Affordability: A Possible Good Omen

by Lawrence Yun, NAR Chief Economist

Amid all the media reports on how housing is still “in the tank,” one piece of news seemed to have escaped many of the pundits. Housing affordability could possibly reach an all-time high of near 200 in the second half of this year. That is, a household making the median income would have twice the income necessary to buy a median-priced home in America. To date, NAR’s housing affordability index reached an all-time high of 184 back in early 2009. It was only slightly above 100 during the housing bubble years, meaning that qualifying income barely met the requirements to buy a home even with a 20 percent down payment (if not using teaser-rate, funny/toxic mortgages). Historically over the past 40 years, the average affordability index was 118.

The principal reason for the expected record high housing affordability index reading is the rock bottom mortgage rates of 4.4 percent on a 30-year fixed rate. Add to that modest gains in the average wage rate, which rose 3 percent in 2009 and is up 1.2 percent this year-to-date in spite of the high unemployment rate. Consider now versus then when home prices were at their “bubble” peak in 2006.

Of course, like all things “real estate,” affordability is local as well. There will be considerable local market variations in affordability conditions. Remember that one of the main components of NAR’s affordability index is home prices. Some markets encountered only minimal price declines while others
such as Las Vegas experienced a 60 percent nose dive. Still, on a nationwide basis, the affordability conditions have risen to compelling levels.

However, if a sizable number of people view – rightly or wrongly – that home prices will fall further and raise the affordability levels to even higher levels, then homebuying will continue to remain soft. That will lead to a further build up of inventory and thus hold back a true price recovery. The price decline potential was evident in July’s housing data. Existing-home sales plunged 27 percent to 3.83 million seasonally adjusted annualized units – their lowest level since 1995. Even though there was little change in inventory (with 4 million homes available for sale), the actual months’ supply of inventory rose sharply to 12.5. The sales decline reflected the aftermath of taking the stimulus medicine away. For nearly all of June, homebuyers knew they had to close the deal by the end of June to qualify for the tax credit. Therefore – and naturally – people rushed in to close in June and not wait till July. Qualitative REALTOR® member survey data about recent homebuyers suggest that investors, all-cash buyers, and buyers of expensive homes stayed in the market in July, but first-time buyers did not.

Going forward, home prices may fall, although I doubt in any meaningful way. Even if they do decline, there is no guarantee that affordability conditions will improve. Again, the principal reason for our current exceptionally high affordability conditions is lower mortgage rates. If prices were to fall 10 percent but mortgage rates creep up to 5.4 percent, then the affordability conditions could actually worsen.

As for home sales, there are far fewer people in the pipeline to buy a home in the immediate months after the tax credit expiration. Consequently, expect continuing low sales at least through autumn. But sales should slowly come back because of the high expected affordability conditions. Winter months are generally slow ones for home sales. If sales this coming winter matches up with past “normal” winters, then it would be a good sign that the housing market is getting back on track to normal sales levels. If sales this winter remain 20 to 30 percent lower than normal, then we are looking at trouble with high inventory stuck at a double-digit months’ supply. Remember that the months-supply figure is also impacted by the raw count of homes listed for sale. Since inventory generally declines from summer to winter, the months’ supply will steadily fall, hopefully to 8 or 9 months, and close to the level consistent with continuing price stabilization. For example, inventory fell by 600,000 to 800,000 from July to December in each of the past 3 years. If a similar decline occurs this year and home sales slowly bounce back to 4.5 million (annualized sales) then we can have continuing price stabilization.

A compelling argument can be made about the best affordability conditions, but it will be for naught if consumers lack confidence. Confidence in turn will be directly impacted by the general direction of the economy. Unfortunately, the economic recovery is coming to a virtual halt. GDP growth rates in the past three successive quarters were: 5.0%, 3.7%, and 1.6%. The upcoming GDP growth rates could be even lower figures. (If it turns negative for two straight quarters, then another fresh recession is at hand). At such tepid growth rate the unemployment rate could well reach 10 percent. GDP growth in a post-recessionary environment should be 5 percent or better, not only to start growing but to compensate for the recessionary downfall.

The weak economic expansion means that the job market will continue to look bleak and the unemployment rate could top 10 percent. This does not mean the country is necessary losing jobs on net right now. There have in fact been 763,000 private sector job creations from the beginning of the year to August. The soft economic expansion just means that the job creation pace is too slow to accommodate the rise in the labor force, particularly the recent high school and college graduates looking for work, aside from the need to fully re-hire the near 8 million job losses that occurred in the 2008 and 2009 recession. In a normal good year, there would be 2.5 to 3 million annual private sector job gains.

The homebuyer tax credit appears to have done its job in preventing home price over-correction. NAR prices show stabilizing pattern for the past 12 months while Case-Shiller price data show stabilizing patter for the past 18 months. We’ll still need to wait several more months to get a definitive gauge on price stabilization. At this point, we’ll see how the housing market behaves in the absence of the stimulus medicine. As with any sectors in the economy, it is very unhealthy to be dependent on government help for a long period. Compelling affordability conditions and some job creations are a move in the right direction and we have to just allow some time for these factors to work their way into the system. But an important question that will linger is of when consumer confidence will genuinely return to close on the deal.

For the latest economic forecast insights and analysis, visit http://www.realtor.org/research/economists_outlook.

Recipients of First Tax Credit to Begin Payback

Borrowers who took advantage of the original 2008 home buyer tax credit must begin paying the credit back this year. The Inspector General for Tax Administration (TIGTA) says 950,000 owe money.

The required payments are amortized over 15 years – $500 per year. If the property is sold, the credit must be paid at closing.

The TIGTA says the IRS has the incorrect purchase date in its database for some taxpayers who took the original credit. These people may never be identified as owing money, it admits.

Source: Bankrate.com, Kay Bill (09/09/2010)

Housing Experts Say Tax Credit Had to End

Will the government revive tax credits to encourage home sales? Housing experts are dubious.

Even suggesting that the tax credit might be revived could have a negative effect on the market, says housing economist Tom Lawler, because it could “lead many a prospective home buyer to hold off on buying a home.”

Earlier this month Richard Dugas, CEO of PulteGroup Inc., said earlier in August on an earnings call: “Almost regardless of how future demand plays out, we still believe that the tax credit had to end. We need to know the true level of demand without government stimulus distorting the market so that we can continue to properly position our business for ongoing improvement.”

Source: The Wall Street Journal, Nick Timiraos (08/30/2010)

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