By Doug Hutchins, Castle Pines North Real Estate
How will the expiration of federal tax credits effect my listing at 8709 William Cody Drive and others?
“Is this party really over?” Or, did federal tax policy, and what some would call reckless federal “spending”, actually prime the Denver real estate pump for future sales
It is always interesting to see the effects of government policy. As you likely know, the federal government offered an $8000 tax credit to first time home Buyers and a $6500 tax credit to current homeowners who purchased another home. To obtain the credit, Buyers had to be under contract with a home no later than April 30, 2010 and had to close by June 30, 2010 (Congress did extend the June 30 closing date to September 30 at the end of June). It is now very clear that this tax credit was successful in driving Buyers to purchase homes in metro Denver. But the big question now is what will happen to the real estate market without the tax credit?
To answer where I see the market going, I think it is important to quantify the effect the tax credit had on the metro Denver home sales. I looked at data from the first six months of 2009 (when the tax credit did not exist) and the first six months of 2010 to see what happened to closed sales and under contracts. A home goes “under contract” when a Seller accepts and signs an offer from a Buyer. A home is “closed” when the Seller actually transfers the title to the Buyer, which usually occurs 30 to 45 days after going under contract. The data I reference is strictly for single family homes, but a similar effect was seen in the condo/townhome market as well.
During the first six months of 2010, “closed” single family home sales were 7.0% higher than the first six months of 2009. But this data alone does not tell me whether the increase in closings was due to the tax credit or due to a real improvement in the real estate market.
The tax credit effect is very evident when you look at the homes placed “under contract” during the first six months of the year. Remember that homes had to be placed under contract by April 30th to qualify for the tax credit. In January through April of 2010, 16,152 homes were placed under contract in metro Denver. This was an 11.0% increase in activity compared to the 14,546 homes placed under contract in January through April of 2009. In May and June of 2010, 6,303 homes were placed under contract in metro Denver. This is a 28.1% decrease from the 8,769 homes placed under contract in May and June in 2009. If the increase in closed units was due to a real improvement in the real estate market, the May and June under contracts would have continued to exceed the 2009 numbers. This was not the case so we have proof the tax credit greatly affected the market.
In addition, the tax credit did not generate any significant amount of new Buyers. It just encouraged people that were planning on buying during the summer of 2010 to purchase before the tax credit expired. The Buyers who would have purchased in May and June instead purchased in the first four months of the year to take advantage of the tax credit. The tax credit drove an additional 1,606 homes sales in the first four months of 2010 compared to 2009. But the “hangover” from the tax credit resulted in 2,466 fewer sales in May and June compared to 2009. I am worried that the “hangover” is larger than the benefit gained in January through April. To me this indicates that sales at the end of 2010 should be below the number of sales in 2009. July and August will be the barometer of how long the “hangover” lasts and the severity of the “hangover”.
The effect of the tax credit on pricing is difficult to determine at this time. The best barometer for pricing in my opinion is the Standard and Poor’s Case Shiller Home Price Index. I do not like to use this index for determining a nation-wide price trend, but I think the data is very valid within each metro area tracked. The Case Shiller index is reported two months behind the actual date, so data for July and August will not be available until late October. If this index shows prices dropped in July and August in metro Denver, we then know that the tax credit substantially affected pricing along with the volume of sales.
If the index does show a drop in prices, then the data for the 4th quarter of 2010 will tell us if the market recovered from the “hangover” quickly or if the hangover will continue into 2011.
4 Comments
I couldn’t agree with you more. The tax credit just gave added incentive to those first time buyers that were going to buy regardless of the credit. It’s my belief that it nudged more would be buyers as well so you see the increase in sales. However, now we will have a few months of lagging performance because we gave those buyers added incentive to move sooner than they would have.
Buyers bought before the tax credit and they will continue to buy after. Whether it be seller financing or conventional. People will always need a place to live.
People are going to new job in other areas, separated, get marry, ect, people will always need a new home. The market will maybe slow down a little over the summer, but in Septeber – October will it be normal.
Nice one.Buyers bought before the tax credit and they will continue to buy after. Whether it be seller financing or conventional. People will always need a place to live.
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