Tax Credit Expiration Driving Home Sales

The tax credit sunset is spurring home sales

In just 31 days, the government will cease the $8000 first time homebuyer and $6500 repeat home buyer tax credits. Nobody is sure how the market is going to react, but real estate agents and brokers are beginning to see sellers cut prices in order to sell their property prior to the expiration of the credit.  Buyers are scrambling to get a deal signed prior to April 30th (although they have until June 30th to close if a contract is in place by the end of April).

Existing homes sales have been trending downward for the last three months. New home sales in January and February declined to the lowest levels since the government started keeping track. Home prices have been steadily depressed by an increasingly large volume of distressed homes. Despite these losses, there are reports from across the country that the market is heating up in response to the expiring tax credit.

Already there is talk of extending the credit, although lawmakers thusfar have been adamant the credit will expire on April 30.  Senator Johnny Isakson, who was instrumental in driving the extension through the senate made clear he had no intention to extend the bill again.  Real Estate industry groups promised that the second extension would be the final extension.

In a New York Times article this morning, Robert Shiller (co-creator of the S&P/Case-Shiller Housing Index). Shiller was quoted as saying: “The Credit interferes with the market in an arbitrary way, but ending it now would be psychologically powerful”. Shiller is in favor of gradually withdrawing support from the market. Other economists feel that extending the tax credit would produce diminishing returns as many buyers have already taken advantage of the credit.

Some states have begun instituting their own housing support measures to replace the government program. Last month California extended a $10,000 state tax credit. South Carolina is offering down payment assistance for many civil servants, and the New Jersey legislature is debating a tax credit program.

It is worth noting that this is a mid-term election year, and there is a lot of anti-incumbent sentiment amongst voters as a result of the poor economy. Very few members of congress are going to want to be seen as responsible for letting the housing market fall apart.  While I suspect the credit will ultimately expire, I do not think this is the last we have heard of talk of an extension. We should never underestimate the lengths our elected officials will go to in order to stay in office.

What do you think will happen when the credit expires? Will Congress let it expire? We want to know your opinion. Join the discussion below.