Cheaper Prices—More Than Tax Credit—Motivating Home Buyers

As the deadline approached, the National Association of Realtors urged lawmakers to extend the $8,000 first-time home buyer tax credit, insisting that the perk had played such a vital role in the housing market's recent stability that its expiration was too risky. "Without congressional action now, the market and our national economy may freeze again—possibly as soon as this month," Ron Phipps, NAR's first vice president, told a Senate panel on October 20.

Congress complied, passing bills to generously extend and expand the credit. The legislation—which President Obama signed on November 6—means $10.8 billion in lost revenue for Uncle Sam on top of the more than $10 billion that first-time home buyer tax credits have already cost.

[Check out Expanded First-Time Home Buyer Tax Credit Becomes Law.]

But in a recent NAR survey, only 6 percent of first-time home buyers—who made their purchase during the 12 months ending last June—cited the tax credit as the primary reason behind their decision. The results suggest that other factors, such as attractive interest rates and falling home prices, deserve more of the credit for the market's recent uptick, says Keith Gumbinger of HSH.com. "The most powerful force at work is the desirability of buying a home and the market conditions—that's your mortgage rates and your prices," Gumbinger says.

After peaking in 2006, average home prices have plummeted back to 2003 levels, according to the most recent Case-Shiller home price report. Meanwhile, rates on 30-year fixed mortgages fell to 4.93 percent yesterday, according to HSH.com. That's down sharply from 6.20 percent a year earlier, before a Federal Reserve asset purchase program began driving down rates.

[See Home Price Declines Becoming Less Jarring.]

The backlog of unsold existing homes dropped to a 7.8-month supply in September from a 10.6-month supply in August 2008. And home prices, while still falling, have eased off the precipitous rates of declines from earlier months. But Mike Larson of Weiss Research says that the first-time home buyer tax credit—originally enacted in February—has played only a marginal role in the development. "The tax credit is a little bit of sugar on top to get somebody to go ahead and take that bite," Larson says. "But the reality is they were hungry anyway."

The run-up in home values during the first half of the decade priced many buyers out of the market, Larson says. The national housing crash, however, has made many of these properties affordable again. "People do fundamentally, generally, want to own homes," he says. "What the falling home prices have allowed people to do is to afford homes that they hadn't been able to previously."

The tax credit was the fourth-leading "primary" reason first-time buyers made their purchase, according to NAR's 2009 profile of home buyers and sellers. At 62 percent, the desire to own a home was the leading reason, followed by the affordability of homes (10 percent) and a change in family situation (8 percent).

Paul Bishop, NAR's vice president of research, said that while only a small percentage of respondents identified the first-time home buyer tax credit as the "primary" reason for their purchase, its impact on buyer confidence—and therefore the market—has been profound. "For a number of first-time buyers, [the tax credit] does make the difference in terms of whether they want to purchase today or wait six months," Bishop said in an interview.

The $8,000 first-time home buyer tax credit was included in President Obama's massive stimulus package. But with the fiscal 2009 budget deficit swelling to $1.4 trillion, some have questioned whether additional real estate subsidies are the most effective use of government cash. For example, the financial blog Calculated Risk has estimated that the government pays about $43,000 for every home sale it triggers through first-time home buyer tax credits.

The first-time home buyer tax credit expansion passed earlier this month is even more generous. It makes most current homeowners eligible and lets married couples making as much as $225,000 a year claim the credit. In addition, the new legislation pushes the tax credit's closing deadline back to the end of June.

NAR's own survey makes it increasingly apparent that the credit rewards people for a choice they would have made anyway, Gumbinger says. "Based upon [NAR's] numbers there, only 6 percent say this [first-time home buyer tax credit is] the reason [buyers are] coming in," Gumbinger said. "That says 94 percent would have done it anyway."