A New Chapter? We Hope. | John Burns Real Estate Consulting

A New Chapter? We Hope.

The federal government has essentially adopted three of our four recommendations to “Unlock the Housing Market,” which puts us on track to have the housing market recover by 2011. While two years seems like forever, it will be here before you know it. We have many hurdles to overcome to get there.

The area where we believe the government fell short was to “Stimulate Home Buying.” While the $8,000 Federal tax credit and $10,000 California state tax credit, along with low mortgage rates, will help tremendously, it will not be enough to bring demand and supply back into balance in 2009. We had suggested temporarily doubling the mortgage interest rate deduction, offering a match on down payments, and providing mortgages to investors who make a 30% down payment.

Nonetheless, the tax credits will certainly help the builders shed standing inventory. From creative introductions like “No Games, No Gimmicks” by Shea Homes and “Crazy 8s” by Beazer Homes, builders are using this new incentive to unload as much standing inventory as possible.

There are pros and cons to this new tax credit. The biggest challenge is that the $8,000 federal credit is not substantial enough for areas with higher home values, and it won’t help the moveup market as individuals must make under $75,000 per year or couples must make under $150,000 to claim the full credit.

Can builders figure out how to make this another zero-down loan opportunity? The Federal Tax Credit of $8,000 could essentially provide consumers with their 3.5% down payment for homes priced at $230,000 or below. Some state housing finance agencies, such as the Missouri Housing Development Commission, have introduced programs that provide short-term credit acceleration loans that may be used to help fund a down payment. Private firms are also considering providing vehicles to monetize the tax credit at closing.

While there is some concern that consumers will be buying homes again with no equity, causing further foreclosure activity in the future, we note that buyers will need to document their income and prove they are creditworthy. Also, they will be buying a home at a massive discount and, in some markets, for the same monthly payment as renting. This is a risky mortgage by historical standards, but far less risky than at any time in the last 5 years. For those of you who are still crying that this is a moral hazard, we have two comments:

  1. You are right
  2. Would you prefer that home price declines continue, leading to:
    • further reductions in your net worth,
    • an inability to access your cash or use your credit card, and
    • the eventual loss of your job because your company is suffering due to the lack of spending in the economy?

Our conversations with industry executives are that the effects of the tax credit are “too early to tell.” However, several builders have told us that they are seeing some good early responses and that – more importantly – the tax credit is causing qualified consumers who are confident in their earning ability to consider buying a home before the expiration of the credit at year-end.

California residents also got an extra incentive to buy a new home with a $10,000 state tax credit payable in equal installments over a three-year timeframe, this credit is being offered until March 2010 (or until the $100 million credit allocation is used up). This credit will be used up in a few months as there are more than 6,000 new homes in escrow that will use the credit.

Will tax credits, low mortgage rates, low prices, and continued aggressive government lending turn around the housing market? We HOPE.


If you have any questions, please contact us at (949) 870-1200 or fill out this form.