First Time Homebuyer Tax Credit - Its Pros And Cons
Print View - Published: Sat, 15 Jan 2011 at 11:14 PM
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Initially, any incentive which would appear to encourage to kick start the economy would appear to be positive, and for the most part they are. But, they do backfire occasionally since the markets react to the changing sentiment in unexpected ways.
The first time homebuyer tax credit plan, for example, is one such example. Designed to create a rise in home sales by providing tax incentives to the people who buy within a certain period, initially, it appeared to be a great success. For those who were buying, a potential $8,000 in savings was a significant amount thus many took advantage.
With sales up strongly, house prices in turn increased and the entire property market was looking very healthy indeed and with house prices on the rise there was every reason to be confident.
However, after the tax credit period expired, things started to look a little different. Prices dropped significantly between May and June. Market analysis showed that 3 in 4 property classes showed declines of between 4.6 % and 6.8 percent. The only property class to see a rise was damaged foreclosed properties which saw an average increase of 5.9 percent in June. Some homes that were previously having 2 showings every day were now lucky if only one viewing was given every week.
In June, the share of home buyers who where first time buyers was 42 %, which was well below the 48 percent share in March. This reflects the federal tax break of up to $8,000 for first time home buyers provided that they were under contract by April 30th.
The increase in buyers during the tax credit period led to the sharp decline. Individuals rushed to purchase a home during this period whereas they might have otherwise waited. Because those who might have purchased later in the year have already done so, it means that demand has been removed from the market for that time of year.
The concept behind the tax break was to encourage people to buy a property while otherwise they might not have. Instead, it appeared as though people who were benefiting from the tax break were simply bringing forward their decision to buy a property from later in the year.
A sharp increase in the demand for houses before the tax credit period finished in April made it seem as though there was a higher demand in general. This demand in turn drove up house prices giving the appearance of a healthy market.
However, these sales statistics were artificial because instead of the market really seeing an increase in demand as it appeared, it was really just a case of the same level of demand being pushed together into a smaller time frame.
When the tax period got over, the overall market demand began to even itself out to reflect the true figures. A summer slump would be seen where all of those who might have been buying a home had already done so. A lower demand lead to lower prices so the people who were looking to sell their home were left stuck.
Even if the housing market does stay in a slump throughout the summer and the winter, we can be sure that we will see a peak again when the next tax break comes about.
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