Congress to Consider Extension of the First-Time Homebuyer Tax Credit

by Coldwell Banker Evergreen Olympic Realty, Inc. on October 27, 2009

This is a big week for both supporters and detractors of the federal government’s first-time homebuyer tax credit. Key votes will occur over the next couple of days that may decide whether the credit gets extended (and perhaps expanded) beyond its current expiration date, December 1, 2009.

According to the National Association of Realtors, the tax credit will be reason that 350,000 people chose to buy a home this year. This group represents about 6% of all homebuyers in 2009.

This stimulated demand is helping bring down housing inventory, which is one of many factors needed for a recovery. The inventory of unsold homes across the country is now at a 7.8 month supply, which is the lowest level in more than two years. A 6 month supply is considered a balanced market.

However, far more people, nearly 1.8 million, will actually benefit from the first-time homebuyer tax credit. This means that nearly 81% of first-time buyers would have purchased a home even without the credit.

The reason has to do with price. The tax credit, which equates to a more than 4% of the median priced home’s cost, is a nice incentive. However, it is not enough to overcome the cost of buying an overpriced home. Affordability is the real driver of home buying decisions. The median price of a home in the U.S. is now below $178,000, which is 12.5% below year ago levels.

In our local market, overpriced homes are requiring far more than a 4% reduction in price before selling. In September, the overpriced homes required on average a 21% price reduction before selling.

Almost half of the homes are well-priced right now. To buyers of these homes, the tax credit is making a difference. Whether it is making enough of a difference to convince Congressional leaders will be played out this week.

There are two proposals that may be considered this week. This first, offered by Senators Dodd and Isakson, is an extension of the credit through the middle of next year. It would also expand the credit to all buyers of a primary residence. The total cost of this proposal would be $16.7 billion.

The second proposal, offered by Senate Majority Leader Reid, would extend the credit through the end of next year. It would apply only to first-time buyers. The amount would remain at the existing $8,000 (or 10% of the purchase price, whichever is less), but it would phase out $2,000 each quarter throughout 2010. The lower cost of this proposal is one of the reasons it is emerging as the favored proposal.

Regardless of the direction, it should be an interesting week on Capitol Hill.

Click image to enlarge.

Statistics compiled by Coldwell Banker Evergreen Olympic Realty, Inc. from the NWMLS database. Statistics not compiled or published by NWMLS.

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