What Will Happen to Housing Prices if The $8,000 Tax Credit Goes Away?

MUST READING IF YOU ARE CONSIDERING A HOME PURCHASE

It’s not just a compelling article title, we will indeed tackle the topic in this, our October installation of the Insight newsletter. The $8k tax credit has provided a needed boost to the housing market, not just here in NC but nationwide. We are crossing an important bridge in the recovery this winter as we enter a seasonally weaker time for home sales with the potential loss of a huge incentive. Stay with us as we diagnose the current situation below. If you own a home, are considering purchasing a home, or just follow the market – this is essential reading.

Look Over Here, But Not Over Here

The “look over here” is a sales move used to draw your attention away from a negative feature and on to a positive one. Utilized by realtors and salespeople worldwide, this little tactic fools some, but not many. This little maneuver has lately been featured by the government and press. The $8k first time home buyer tax credit APPEARS to be the most important component to the recovery we’ve seen in home purchase activity. It indeed has been a very important program, but more important has been the $1,000 bn planned purchase of GSE agency debt. GSE or “Government Sponsored Entities” include mortgage finance companies Fannie Mae and Freddie Mac. These two have been buying mortgages originated by the banks in the boatloads. Lately they have been able to sell the debt right away to the Fed, acting on behalf of the Federal Government. This $1,000 bn purchase program was instituted in the spring, and is running out (over 75% of the money has already been spent on the agency debt.) This backstop has done what it’s supposed to d get the mortgage money flowing again. It’s also led to record low Fixed Mortgage Rates. Since the government has been a ready buyer for these FHA and conforming mortgage products, pricing has been on a downward path. But what happens when the money is spent?

Between a Rock and a Hard Place

It would be very easy for Uncle Sam to renew the $8k home buyer stimulus and institute another $1,000 bn in cheap mortgage debt purchases, but it would also be easy for us to go on a Visa spending spree – the point is someone has to pay for it all someday. So eventually the government has to let (let’s hope) the chips fall where they may. It’s also safe to assume that foreign holders of US Debt won’t be as patient with us if we continue with such programs. So our government’s hand will be forced at a certain point, even if we see a temporary extension of both housing stimulus programs.

When the programs end we will see higher mortgage rates. If the government isn’t buying Fannie and Freddie debt with reckless abandon, there aren’t many buyers. In order to attract more buyers, the yields must be higher. This leads to higher mortgage interest rates and less banks willing to originate residential mortgages. Trust me on this one, affordability will change in the next year.

Why Many of You Should Consider a Purchase Now

This installment of Insight isn’t very rosy, so how could I possibly recommend purchasing a home? Two reasons: real estate is local and affordability won’t be better. The two caveats are for home buyers with a short time horizon and cash buyers. If you will be using a mortgage and looking to be in your home 3+ years, however, these two reasons should keep you from waiting for lower prices. The issues laid out above are national ones, and they will have some effect on every housing market in the country. Real estate is local, however, and many markets will outperform. The market fundamentals of the Raleigh/Durham area are far superior to others across the country. Smaller inventory of unsold homes, shorter days on market, lower median housing prices, desirability of the region, and lower unemployment are all factors working in our favor.

The stronger argument for the two is housing affordability. Unless you are a cash buyer, mortgage rates have a significant impact on monthly payments and overall affordability.

Numbers You Must Consider

30 year fixed mortgages around 5% are available right now, but let me show you what that means. For our assumption let’s say you are financing 100% of a $200,000 home purchase. Your monthly mortgage payment on a 30 year fixed rate mortgage at 5% would be $1,073. Many experts believe the GSE debt purchase program is keeping rates 1 to 1.5 points below where they would ordinarily be. Add in another .5 to 1 point in anticipated inflation, and I strongly believe a 7% rate will be the norm within the next 12 to 18 months. A 7% interest rate would swell your payment to $1,330 a month. That $200,000 home would have to drop in value to $161,250 or 19% in order to get the same monthly payment!

Will the ending of the $8k home buyer incentive hurt the housing market? Yes.

Will the ending of the $1,000 bn GSE debt purchase program hurt more? Yes.

Will prices go down more than 18% to compensate from lessened affordability? NO! We’ll see softening of prices for a number of reasons, but not 18% or more, and particularly not in Wake County.

If you have doubts, questions, or disbelief about any of my assertions in this article, please call me. If you are considering a home purchase at some point in the near future, please call me. My line is open, I’m here for clients, and I would love to help you in any way I can.

All The Best,

Joe