Tax Credits: “The Hangover”

How’s the Denver real estate market?

The Denver real estate market is suffering from the after-effects of the tax credit party. May home sales plunge 41%.

May home sales statistics  from Metrolist have plenty of support for both optimists and pessimists.

As Charles Dickens might say: “It was the best of times. It was the worst of times”.  I say: “We are suffering from The Hangover.” Tax Credits to buy homes are gone (probably forever) and the party is over. But, we sold a ton of homes under $300,000 and some of those buyers actually did move up and buy more expensive homes.

But, most didn’t. Most sales were short sales and foreclosures that were heavily discounted. Homes priced over $500,000 have continued slow sales and prices, generally, have dropped but not in every market segment.

For optimists, we can consider that closings were way up in May.

4365 homes were closed. That’s the highest number of homes actually sold in any month this year and a huge increase of 20.3% from 2009. Plus, days on the market actually decreased to only an average of 75 days.

Title companies can hardly close all the transactions and getting a closing time requires substantial notice. Extra personnel are even being call on to close these transactions. But, it is not as rosy as it sounds. Land Title told me that they were not hiring any new personnel because they expect closings to subside when all the  Tax Credit sales are closed by June 30.

"Cash For Clunkers" artificially increased auto sales. Now, tax credits for homes are effecting Denver home sales similarly. Homes sales may rebound after a brief drop..

In other words, sales were attracted to the Tax Credits and had to be under contract by April 30 and closed by June 30. But, if “Cash For Clunkers” in the auto industry is any example, the sales curve was just moved up and subsequent month sales will be depressed. Most of these buyers would have purchased eventually, their timetable was just moved up by the lure of up to $8,000 in federal tax credits.

Days on the market can be deceptive too. That only includes actual sales. Overpriced homes and homes in terrible condition or neighborhoods that did not sell were not included in that statistic. So, if a home were to be well priced, it was more likely to sell quickly especially when Tax Credit buyers were chasing the best listings.

Pessimists would point out that the number the listings on the market actually increased 2.3% in May over April. 21,433 homes on the market is the largest number this year and sets the stage for a more difficult market ahead.

Denver also had the lowest percentage of reduced-price homes on the market in the nation in May. Optimists would say that this shows how healthy the Denver real estate is. Pessimists would contend that this bodes ill for future home sales because buyers are looking only for the “bargain” homes.

Under contract sales in May plunged 41% from April and 27% from May 2009. Ordinarily, that would spell doom and gloom for the real estate market. But, again, consider that March and April sales were artificially high due to the looming tax credit deadline. So, May and June sales were likely to be artificially low. Sales were simply reallocated by the tax credit.

So, who is the winner from all this. Right now, buyers win. Sellers are getting more motivated so buyers can negotiate better deals now from private sellers. Buyers might consider buying now before home inevitably increase again just like auto sales did a few months after the federal credit ended.