Friday, August 21, 2009

Housing Market Improves as Tax-Credit Deadline Approaches

The National Association of Realtors this morning announced it's estimate of US existing home sales for the month of July. The data showed a substantial uptick in sales, representing an increase of 7.2% from the month of June, and a 5% increase compared to levels seen a year ago. The latest surge in activity is a relatively well-timed "event", as new housing starts have stagnated at an extremely subdued level over the past few months. The combination of stagnating or declining starts, and rising sales is a confluence of activity that is necessary for a recovery of the US housing market. As I've stated previously, the further that these two trends diverge - think widening spread - the faster the market can absorb the glut of unsold inventory. Although today's release indicates that we are currently diverging in the proper direction, there is a risk that still remains.

As the cognizant amongst us are aware, the stimulus package has provided for a First-Time Home Buyer Tax Credit worth $8,000. And yes, this credit is "the good kind"; in other words, it isn't a deduction against taxable income, but rather a full, refundable even, credit against taxes owed to the federal government. The problem is, to be eligible for the credit, you must purchase your first home prior to December 1st, 2009. The question then is, to what extent can we attribute the recent jump in existing home sales to the existence of an $8,000 tax credit? Additionally, are we merely witnessing a phenomenon whereby the majority of tax credit related purchases have been delayed until the final months of the "program"? Another somewhat similar government program, Cash-For-Clunkers, was exceedingly more measurable due to the real time processing of rebates by auto dealerships. With the home buyer tax credit though, we'll have to wait until tax season before any reliable data becomes available. The alternative indicator would be a severe drop in existing home sales beginning with the December 2009 data. Hopefully we won't have to find out that way. Sphere: Related Content

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