Don - Interesting analogy. But let's imagine walking in the shoes of the 40 Million Americans who are living on foodstamps? or the many Americans facing homelessness as a result of foreclosure?
Bottom line: NO Jobs...NO Shoes
If you can't afford to put food on the table, you are not running out to buy shoes.
Oversupply of shoes...limited demand...the shoe salesman has to keep lowering his price or offering incentives to keep food on his table and shoes on his own feet.
The expiration of the federal homebuyer tax credit, the lack of job growth (jobless rate hovered near a 26-year high) and the tsunami of foreclosures still to come ...pose a bit of a damper on the housing industry recovery.
Mortgage rates will inevitably rise. When rates rise, housing prices will fall further.
The first time home buyer credit had a short term positive effect, but the market will readjust. And that likely will mean slower sales in the coming months than if there'd been no credit.
Here's an analogy:
Consider a shoe store. Most people need shoes. But most people also have a limit on the number of shoes they need and want. They're not shoe collectors. The national average seems to be that people buy about 5 pairs a year. They do own more, but their inventory stays fairly stable. As one pair wears out, they buy another.
So one day a local shoe store starts giving out $8 rebates for every pair sold. And that really spurs demand. Parents buy another pair for their kids. Men and women buy another pair or two. But the program has a finite length. All shoes must be purchased by June 30. So sales of shoes go up.
But after June 30, what happens? People only walk so far a day. They only need a finite number of shoes. And they have other things to spend their money on--food, health care, and so on. So now they've bought all the shoes they need. And they take a break. True, in a few months or more they'll need more shoes. But not now. And even though buying conditions may be good--an ample number of shoes available, affordable credit card rates for anyone who wants to put the purchase on their credit cards--nearly everyone who needed shoes bought them.
Certainly some folks who just moved into town and had never bought shoes in that town are first-time shoe buyers. But now they've stocked up. And although the rebates first were designed for those new shoe buyers, those rebates were extended to people who already owned shoes for awhile. So those folks also bought shoes and now they're in good shape, too.
So, what's going to happen?
Shoe sales will drop. The demand has been satisfied. When the shoes start wearing out, some people will get them repaired. Others will buy new shoes. But, for the moment, they've bought all the shoes they want.
On top of that, now when someone goes into a shoe store and remembers that they saved $8 on a pair of shoes with the rebate, they'll expect shoe prices to cost less than they had pre-rebate. They'll say to the shoe salesman: "Last month, my neighbor bought these pair of shoes for $100 and got $8 back. Now I see the shoes for sale here at $100. I'd like to get $8 back, too. Or at least something. If you want to sell me these pairs of shoes, you'll have to do better than $100."
See how it works?
Hope that helps.
This was a great question and one often discussed around my office. I would venture to say that yes, this can be adverse. There are a lot of Realtors who were using this credit to their advantage to get others to buy and possibly at their max loan amount. Which as you are smart enough to figure out can cause even more ripples in the already shaky waters.
This is where choosing your Realtor can be THE most important thing. I always advise my clients (especially my first-time homebuyers) to buy within their budgets as well as use utilize any money they receive wisely.
Since I am answering this post after it has indeed ended, I can tell you yes, it has slowed the market a bit in my area according to collegues. There was quite a push for soo long that the buyers have almost dropped off and we are left with sellers, which can cause what you said, a drop in home prices.
It was a great incentive, but only if used wisely!
I have never seen such an offer in all of my 16 years of selling Real Estate in South Dakota. And yes, there can be good with the bad!
If the government was going to offer an incentive to prime the pump, that didn't happen. If it was going to offer the incentive to help the industry navigate a difficult time, that might have happened.
The money would have been better spent as training. Jobs have gone missing for a few years. Don't expect a big surge in real estate activity because consumers are spending more and there is less unemployment. It will take some time for confidence to return. It will take some time for some people to recover.
An aside: Just yesterday someone posted a question in Denver on how to manage her financial breakup with her boyfriend that she combined resources with to take advantage of the tax credit.
I have maintained all along that buying would have to offset the foreclosures. Foreclosures have depressed the market and threaten to sink home prices even further. The needed confidence that would restore investing and purchasing to higher levels is still missing two years after the recession officially ended.
More attention should have been given to preventing foreclosures. The programs that were put in place were failures.
Unless there is a sudden upsurge in hiring, the market will remained depressed.
Interestingly, the stimulus for the car industry had a different effect. Once the cash for clunkers cars were bought(by the government) , the industry seemed to recover. However, used car prices peaked because so many cars were taken off the road. Decease supply, increase price.
Now there are so many forclosurses being sold at 50% of FMV, it's making it hard for home owners trying to sell at FULL PRICE. Therefore bringing property values of the WHOLE area down.
The next time you see Rich Bankers out there, thank them for bringing the economy down to what is is today. Just think, it's not over yet!!! It has just begun. It's going to be a downward spiral for at least another 10 yrs. Don't beleive me, pick up the Newspaper and watch the News!!
This is most certainly a great question but, I would be fooling you if I thought I could possibly know the answer in this crazy market.
Flagstaff Real Estate Professional
"Results through Performance"
Russ Lyon Sotheby's International
Those incentives helped to front-load--rather than stimulate--sales, because the market correction wasn't finished (as the current data has confirmed). The rise in commercial foreclosures, the unemployment figures, and the amount of properties in the shadow inventory are strong indicators that the market still has more room for correction.
I agree with Sheila's statement, "I have mixed emotions about incentives perhaps prolonging a recovery instead of letting the natural cycles of the market resolve itself." Moving forward the general public and our politicians need to realize that constantly manipulating policy to every whim won't stimulate demand. Good prices/terms, good jobs with fair wages, and sensible policy help to stimulate real demand that's sustainable.
The government's "Cash for Clunkers" for real estate will create many unexpected consequences, including a further erosion to the real estate market, especially in areas suffering from high unemployment.
Tax Credit "Hangover Effect" Already Upon us in Palm Beach Gardens
We are certainly expecting a â€œhangover effectâ€ from the tax credit ending however did not expect to see it impact us so quickly as buyerâ€™s still have until the end of this month to close and qualify if the contract was signed prior to the end of April.
Interestingly, I am seeing a pick up in higher price points in my own business and in our market in general. To some degree this relates to the movement in the first time buyer group, allowing market to continue to move at higher levels - it is after all, all related. As entry level buyers buy, the owners of those homes are in the position to do the same, and so it goes.
There is no question but that the tax credit motivated first time buyers to act. Now NJ and other states are considering similar incentives and brokerages are promoting the idea of encouraging sellers to pick up where the government left off by offering closing cost incentives.
Time will tell the overall effect - I think that the sooner the market is allowed to operate without external intervention, the sooner we will complete the correction and begin recovery.
Unwavering Commitment to Service
When I reviewed markets in my area I saw that the typical first time buyer markets increased 30+% in april but other markets showed flat to declining sales. It is all going to be a function of the number of months of inventory, compared to the sales activity the rest of the year. Another issue is how the banks deal with all the loans in the modification (hamp program). If the banks start denying mods the listing numbers could increase dramatically.
The issue will be jobs and inventory level. Only time will tell.
First Weber Group
Certified Distressed Property Expert
It's always possible but, no.
In the short term some 1st time homebuyers might have jump off the fence and went ahead and bought just because of the $8,000. I think that most the sells that are happening now are because buyers are seeing great buys (low prices and great intrest rates).The inventroy of homes seems to be falling (one reason for this is the new home builder are not building homes like they were a few years back). Short term maybe, long term, NO
Wouldn't buyers who now can only raise the 3.5% be better off adding the tax credit to the pot and possibly get a better loan arrangement, better rates?
What would be the downside of buyers waiting?
The FHA has just announced steps to include the $8,000 as part of a down payment rather than just a tax credit which should further help the cause.
For more information on the FHA news, visit the link below.