It seems today, the stimulus package is all but done, so maybe by next week, the final details are known. One idea which is being kicked around alot, is the $15,000 tax credit for home buyers. If this passes, you will no doubt hear tons of realtor experts claiming, "this will really change the housing market, better buy now!" My belief is that it will make almost no difference to the housing market long term, and probably very little short term as well.
To understand my position, we must first turn to the economics of housing prices. Houses are not commodoties, housing is an 'asset class', a thing of value, but houses are not interchangeable. Furthermore, the sales practices of housing, and purchasing patterns, make transactions both expensive and very veryÂ slow. Compare this to buying say a ton of rice or a barrel of oil on a commodity exchange, which is done instantly,with little transaction overhead, and each ton of rice is interchangeable with another ton. The reason this is important, has to do with the SPEED of price corrections of each. Commodity markets reset prices to market information instantly. A stock can drop 100% in 24 hours. In housing, it takes many many months, sometimes years, for the reality of a market to affect prices. The prices are notoriously sticky, so what happens in the meantime, is the supply of homes for sale increases, and prices slowly trend downward, until that oversupply clears.
So lets assume the $15000 tax credit for all homebuyers passes. What will the effects be?
Supply side: Basically, zero effect. The problem today is there are too many homes for sale, too many vacant homes, and too many homes in/going into foreclosure. Foreclosures especially are non producing assets on a banks books, so they want them sold quickly, and will cut prices to do so. In the Phoenix market, the number of foreclosures/short sales for sale has been climbing at roughly 1000 a month for quite some time. This number would have to stabalize just to stop the market form continuing to get worse, and actually drop significantly from some 20,000 today, for the market to have a prayer of getting better. This credit will do nothing to stop foreclosure supply form coming on the market! In fact with 4000 new foreclosures on average each month, and 8000 new filings of future foreclosures, the evidence is that supply market factors will be bad all 2009. Phoenix metro has lost over 100,000 jobs, mostly in the last 4 months. SInce it takes longer than that to get into foreclosure, it is verly likely that we will be seeing even more foreclosures based on job losses by the end of 2009.
Demand side. Obviously, a free $15000 does change the value of a possible purchase to a buyer. But, in many zip codes in the Phoenix metro, paticularly all of scottsdale, home prices have been dropping that much in 2 or 3 months time. Are many buyers really going to jump instantly, just for the credit? Furthermore, today, a buyer needs: 1. A job history, 2. good credit, 3. a downpayment, and 4 the desire to buy now. How many people meet these criteria, and yet weren't going to buy a home anyways? The only way this makes a difference, is if it influences someone to buy a home that wouldn't have otherwise bought one;Â Over the longrun, I believe this number is negligable. The one effect it may have, is cause buyers to move up their buying decision. For example, I want to buy another home, for my personal residence. If this credit passes, and lets say it goes to december 2009, I might very well try to buy in november/december 2009. At the speed which Phoenix housing prices are diving, I should be able to buy at far under price/rent ratios that would make buying sensible even to 'the professor of doom' as I have been called; Thus, the $15000 credit might cause me to try a bit harder to effect my purchase before it ends. So, it moves a few purchase forward. What happens afterwards? obviously, a drop off in demand, and housing prices head right back to the lows they are already heading towards. (so, if the market fundamentals still look really bad, I might let the credit timeframe expire and just keep watching, since prices are really likely to drop after it ends, muting its effecive benefit anyways)
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