Record Low Rates and Tax Credit Expiry = Home Sale Bargains

by Darwin on May 13, 2010

There’s an interesting phenomena brewing in the affordability of homes for buyers – both of which run contrary to what many experts and the government predicted.  Two things are continuing to move in their favor – mortgage rates and sellers slashing home sale prices.

Tax Credit Expires so Sellers Cut Prices

The New Homebuyer tax credit which was initially envisioned to kickstart the housing market has expired.  What wasn’t widely reported during the credit period was the notion that upon expiry, since the artificial subsidy from the government (You know, the one that shifted tax dollars from payers like you and I to people that were likely going to buy a home anyway) is now gone, homeowners have caught on and are now slashing sale prices – which is not good for housing and the economy obviously.  If a buyer was luke-warm on buying your house with a multi-thousand dollar incentive last month, now they’re going to be even less incentivized to buy your home in May or beyond having to cover that gap, so home sales are stalling.  In order to unload inventory, sale prices must drop then.

According to a report by

  • May saw cuts of prices on 22% of homes, up from 20% a month earlier.
  • Sellers cut a total of $25 Billion on sale price compared to $22.8 Billion the month earlier.
  • The average discount was 10% from initial listing price

This is what happened due to a return to the free market. We may very well see another drop in July when the contracts that were signed to beat the clock on April 30 don’t go through. Inevitably, many people rushed in to get paperwork signed and will fail to fully qualify, get cold feet or back out for other reasons.  Will this result in further reductions?

So, this is good for prospective home buyers, especially the ones that weren’t going to be able to participate in the credit anyway.  Consider the situation of my family.  If we bought in April, aside from the fact that our tax dollars subsidized other people getting the credit, the house we purchased would have had this “bake-in” and we would have paid a premium over waiting until May or beyond, totally exclusive of whatever other dynamics are driving home prices like employment, inflation, etc.  Just food for thought.

Mortgage Rates at 5 Month Low

Another unexpected positive development is that even with the government’s gradual exit from the purchase of mortgage backed securities from the market, mortgage rates are still low – exceedingly low – averaging 4.93% down from last week’s 5.0%.  You may not be seeing rates like this again in a generation.  With the Fed unlikely to raise interest rates with unemployment stubbornly high close to 10% and Europe imploding (which drove investors to US Treasuries), there is no near-term onus for rates to rise.  As such, for at least a while longer, prospective homebuyers are likely to continue to enjoy rates below 5% for conventional 30 year mortgages.

While homebuyers that were eligible for the tax credit enjoyed that benefit, it’s worth considering whether they paid a premium for the house they bought now that sellers are cutting prices, and whether they would have been better off waiting, especially if they made a mad rush to get the paperwork moving before the cutoff (which invariably, a savvy seller would exploit during negotiations for a couple extra grand knowing how desperate said buyer was to hit the deadline).  Could they have had a better shot at a home they wanted if they waited another year with more savings and perhaps a further decline in prices?

There’s no golden advice or predictions here for the future price movements of housing, especially since real estate is local to great degree, but it’s worth noting the unintended consequences of government intervention and how individuals who rushed in to partake in a “deal” conjured up by Washington may actually end up with buyer’s remorse.

Did You Use the New HomeBuyer Tax Credit?

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