Months' Supply of Existing Homes
The US housing market is faced with unprecedented challenges
Washington, DC (PRWEB) September 30, 2009
According to a new economic study released today, the first-time home buyer tax credit has proven to be an effective tool to jump-start the US housing market, and should be temporarily extended and expanded to continue the path to economic recovery.
Issued exactly two months before the credit is due to expire, "Examining the First-Time Homebuyer Tax Credit," offers empirical analysis on how the tax credit, passed in the American Recovery and Reinvestment Act of 2009, is reducing inventories by almost 30% and stabilizing home prices. As policymakers evaluate the success of the stimulus package, this study illustrates that the tax credit is an unparalleled standout, with stimulative effects that go far beyond the single purchase of a home. Further, the study clearly demonstrates the urgency of passing a temporary extension and expansion of the credit to prevent a halting of the housing recovery and a slowing of the economy's momentum.
"For several months, we have seen the tax credit opening the door to homeownership for hundreds of thousands of first-time buyers - particularly low and middle class families - and giving them an opportunity to benefit from historically low interest rates and affordability," said Dr. Kenneth T. Rosen, lead researcher on the study and Chairman of Rosen Consulting Group (RCG). "Bringing these buyers into the market is reducing inventories and stabilizing prices, while at the same time, providing the road to financial security for our nation's middle class.
"Of the multitude of provisions in the stimulus package, the tax credit stands out as a stellar success. It's efficient in that funding goes directly to taxpayers; it's leveragable because it triggers large amounts of economic activity; and it is achieving its specific goal to begin to reduce inventories and stabilize home prices. In short, it meets President Obama's benchmark for stimulus initiatives - it is temporary, targeted, and timely. Right now housing is one of the only components driving our economic recovery, and the tax credit is largely responsible for housing's momentum. But exactly two months from today, the first-time home buyer tax credit is set to expire, likely causing a relapse in the housing market that the nation's fragile economy could sorely afford."
The study found that the first-time home buyer tax credit has served to stimulate demand for homes, particularly among low and middle-income families. It is proving effective in reducing the supply of homes, as the credit has been the primary cause - buffeted by increased affordability - of the return of buyers to the housing market over the past several months.
The inventory of homes for sale has been reduced as a result of the tax credit, particularly at the lower end of the pricing spectrum. For homes priced at less than $300,000, the supply has decreased by 25.9% versus a year ago; and for homes priced within the $300,000 to $500,000 range, the supply has dropped by 18.4%. These numbers demonstrate that the credit is particularly effective at bringing working families into the market.
When the credit was passed as part of the stimulus package, many were concerned that it might spur speculative new home construction, rather than inspiring purchasers to acquire from the existing supply. However, the study illustrates that housing starts continue to remain very low, with the annualized second quarter starts totaling 423,000 homes, approximately 60% lower than the long-term average, and the second-lowest quarterly figure on record.
But conditions continue to be quite challenging in the housing market with a continuing high rate of foreclosure and a significant demand shortfall. As many foreclosures become lender-owned, they add to the supply of available homes. If the credit is allowed to expire, it is likely that lender-owned properties will quickly increase in available supply, at the same time buyer demand significantly retracts.
"Without a temporary extension of the credit, it is very probable that the housing market will fall back to levels of the fourth-quarter of 2008, when the overall economy imploded," continued Rosen.
Beyond simply extending the tax credit, an expansion of the credit would spur an increase similar to what has occurred in the lower end of the market, by motivating buyers in the "trade-up market" to purchase a higher-priced primary home. Expanding the income limits to $125,000 for individuals and $250,000 for a married couple would also enable more households to take advantage of the credit and spur additional demand.
"The US housing market is faced with unprecedented challenges," concluded Rosen. "A recovery in the residential market has led the nation out of recession in nearly every economic recovery of the past 40 years. Housing is an unusually dynamic industry with home purchases stimulating activity beyond the single transaction to extend into retail, manufacturing, and even provide fiscal benefits to help local governments get back on healthy financial footing. The first-time home buyer tax credit has proven to be an effective tool in stimulating demand and reducing supply. Given current conditions in the housing market, this program should be temporarily extended and expanded."
RCG was retained by the Fix Housing First Coalition to evaluate the effectiveness of the first-time home buyer tax credit and the potential need for an extension of the program.
About Dr. Kenneth T. Rosen
Dr. Kenneth T. Rosen, Chairman of RCG and lead researcher on this study, has authored numerous articles and books on real estate and real estate finance. He is the leading expert on housing economics and originated the premise for the 1974-1975 home buyer tax credit while at the Joint Center for Urban Studies of MIT and Harvard University. He is a special real estate advisor to the World Economic Forum and Chairman of the Fisher Center for Real Estate and Urban Economics at the Haas School of Business, University of California, Berkeley.
About the Fix Housing First Coalition
Fix Housing First Coalition is a diverse group of over 25,000 housing stakeholders - including homeowner and community groups, home builders and manufacturers - dedicated to addressing the root cause of our economic troubles. The coalition is advocating for an extension and expansion of the highly-effective first-time home buyer tax credit. For more information, visit http://www.fixhousingfirst.com or follow Fix Housing First on Twitter: @fixhousingfirst.
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