The Advantages And Disadvantages Of First Time Homebuyer Tax Credit
Print View - Published: Sat, 15 Jan 2011 at 11:14 PM
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To start with, any incentive which would seem to encourage to kick start the economy would seem to be positive, and for the most part they are. However, they do backfire occasionally since the markets react to the changing sentiment in unexpected ways.
For instance, the first time homebuyer tax credit plan, is one such example. Designed to generate an increase in home sales by offering tax incentives to those who buy within a certain period, initially, it appeared to be an amazing success. For the people who were buying, a potential $8,000 in savings was a significant sum so many took advantage.
With sales up strongly, house prices in turn increased and the entire property market was indeed looking extremely healthy and with house prices on the rise there was every reason to be confident.
After the tax credit period expired though, things started to look a bit 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 damaged foreclosed properties which saw an average increase of 5.9 % in June was the only property class to see an increase. 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 house 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.
This sharp decline was created by the peak in buyers during the tax credit period. People rushed to purchase a home during this period while they might have otherwise waited. Because the people 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 individuals to buy a property while otherwise they might not have. Instead, it appeared as though people who were taking advantage of the tax break were simply bringing forward their decision to purchase a property from later in the year.
A sharp increase in the demand for homes before the tax credit period finished in April made it appear as though there was a higher demand in general. This demand in turn drove up house prices making it seem like a healthy market.
However, these sales figures were artificial since instead of the market really seeing an increase in demand as it seemed, it was really just a case of the same level of demand being pushed together into a smaller time frame.
When the tax period ended, 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 house had already done so. A lower demand caused lower prices so the people who were looking to sell their house 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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