This was quite a busy week with all of the news coming out of Washington. I finally have some time to sit down and write, so here are my thoughts on one of the recent happenings…
I work with a lot of first time homebuyers, so the $8,000 credit was of particular interest to me. First time buyers (and those that don’t currently own who haven’t purchased a home in the past 3 years) will be eligible to claim an $8,000 credit, or 10% of the home’s value- whichever is less, on their 2008 or 2009 taxes. Essentially, buy your first home between January 1, 2009 and November 30, 2009 and Uncle Sam is going to write you a check for $8,000. Sweet deal, eh?
With the homebuyer credit, I believe the intent is to stimulate the economy in a variety of ways. People buy a house, other people earn money from that transaction process. They then spend that money. Once the house is purchased, goods and services need to be obtained to run the home and make improvements. Eventually the buyer will get their $8,000 check and presumably they’ll make more purchases with it. Or maybe pay off some debt. Or even decide to save it away for a rainy day (which would be smart, but actually would not help the economy).
Do I think this credit is actually going to motivate first time buyers to buy? Yes, in our area, I do. In Greater Hartford, $8,000 is around 2-3.5% of the purchase price of a first time home. This, in combination with dropping house prices, will contribute to more people looking to buy. As long as they have good credit and a down payment available, it should be feasible. If the timing is right for you to purchase a home and the government is going to give you another $8,000, would you really turn that down?
Now, the more important question may be, who is going to capture the bulk of that $8,000- the buyer or the seller? Think about it. In your price negotiations, will the seller be willing to compromise as much on price if they know you, the buyer, is going to get an additional $8,000 for the purchase? As the buyer, will you be a little more lenient on the price negotiations because you know you have a government refund coming to you?
Another effect of this credit would be churn in the upper price ranges of the market. When a first time buyer purchases a home, that respective seller is typically going to do a “move up” purchase. For example, the first time buyer purchases a $300,000 home and then that seller “moves up” to a $450,000-$500,000 home. This is the trend we most often see. But what happens to the seller of the $450,000-$500,000 home? Are they going to move up or downsize? It will really depend on their lifestyle. For example, if they are an empty nester they’ll typically downsize, while if their family is still growing they’ll move up. Either way, there will be two additional moves initiated because someone was potentially driven to action by this $8,000 credit.
Now, is this $8,000 credit going to be the answer to the housing crisis? Heck no. Job security is a major factor when considering a home purchase. But if your job is stable, it could be something of a motivator and is one small piece of the puzzle.