Out of Control Policy Blog

Existing Home Sales Down, Blame Pointed at Tax Credit

The first month of data on housing sales since the end of the First-Time Homebuyers Credit is being released this week, starting with existing home sales. The eligibility for the special tax credit designed to spark a housing market recovery by giving homebuyers up to $8,000 towards a new purchase ended on June 30, meaning July was the first test for housing sales.

The result was severe retraction in sales: existing home sales dropped 27.2% from June to July. Potentially worse, existing home sales dropped 25.5% from their levels a year ago. This is the lowest existing home sales have dropped in 15-years—out pacing even the worst months of the financial crisis.

US Existing Home Sales

This could be indicating a number of things. First, July was the first month since late 2008 that there wasn't a tax credit available, since the homebuyers incentive was extended three times. The tax credit gave people and incentive to buy, when they otherwise might not have, creating artificial demand. So now we are seeing what the real demand for housing is, aside from government subsidies greasing the market. Second, an $8,000 credit wasn't enough to make people who had no money suddenly able to buy a home, so many of those that bought in the past 18 months were likely to buy at sometime in the future anyway. The problem is that this demand has been stolen from the future and dumped in the months of the tax credit. Demand for housing might normally be higher right now, had some of it not been pushed in to January and April.

The story is (not so) strangely similar to that whole Cash for Clunkers failure last year.

And the signs have been pointing this way for a while now (see this post from over two months ago).

Where this may really wind up screwing with the market is in prices. The value of homes is directly tied to the stability of capital markets and bank profitability since mortgages that become more expensive than the home they are funding is worth are more likely to become delinquent, causing further losses to the housing industry—which includes Fannie Mae and Freddie Mac, who are being bailout out by Treasury, which basically means the taxpayers of the United States. Since there was this artificial demand created by the tax credit (and other programs), that demand has been able to help prop up prices, keeping the market from reaching its natural, though more painful bottom. Without the demand created by the tax credit, we could see a significant drop in prices. (Though other federal subsidy programs will try to fight that off.)

Taking this the local level, the Midwest was hit the hardest, with a 35% drop in existing home sales since the end of the tax credit. And some states saw what looked like a stable recovery, collapse in on them. For example, Massachusetts had seen 12 months of increase in the sale of single-family homes. But last month, that number dropped 26 percent. From the Boston Globe on this Massachusetts sales drop:

"It's disappointing to see such a big drop in sales," Warren Group chief executive Timothy M. Warren Jr said in a statement. "It appears the expiration of the home buyer tax credit hurt sales volume. Buyers aren't entering the market as aggressively as they were earlier this year. Whether this is a temporary dip due to the rush to qualify for the tax credit, or whether this is a sign of a declining market for the balance of the year is the big question in my mind."

See the rest of the Globe piece here.

Anthony Randazzo is Director of Economic Research


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