By the time I write this, just a few days after President Obama signed the extended, expanded homebuyer tax credit into law, it’s already old news. I was fielding calls from reporters looking for industry insiders to quote before the ink on that thing was dry. It’s already been covered every which way but loose, so I won’t purport to "educate" you about the bullet point provisions it contains.
However, I submit to you that whether you were pro or con on the credit’s extension, there are some behavioral-economic impacts it will have on the real estate market that have managed to escape the popular media’s scrutiny.
The real estate industry party line on this thing was, of course, that the credit should be extended and expanded for its proven ability to stimulate sales.
However, there was a not insignificant number of vocal dissenters — both within and outside of the industry — who believed that the 2009 credit had already sufficiently stabilized the real estate market and that free-market forces (which we all know by now is decidedly not free, even in the best of times) should be allowed to play out as they might.
Well, it’s here now. And indications are that this will be the last extension of the credit — in fact, the White House wasn’t super keen on it this go-round. So let’s drill down into four new takes on the tax credit, from a behavioral economics perspective. (Advance warning: these are my personal predictions, not fact — we’ll all have to see how they play out!)
1. Calmer, more experienced buyers. From its literal terms, it’s clear that the expansion of the credit will flush new sets of buyers onto the market — the non-virgin homebuyers who are now eligible, and folks who make more than the previous $75,000 (single) and $150,000 (married) income limits but fall within the new $125,000 (single) and $225,000 (married) guidelines. What is not so obvious is what this will mean about the makeup of the homebuyer population, qualitatively speaking.
My sense is that these newly credited buyers will be somewhat more experienced, less fearful and panic-prone, more sedate and more conservative. Even adding in the first-timers, we’re looking at buyers who are slightly more sedate, patient and deliberative — after all, they’ve waited until now versus having taken advantage of the two previous years’ tax credits.
This is good for the market, as it strikes me that the atmosphere, while it will undoubtedly become competitive, will be slightly less frenzied and dangerously inflationary than the multiple-offer bonanza we saw in many markets this summer among lower-income first-time homebuyers trying to cash in on the credit.
These higher-income buyers are not going to have their deals made or broken on the basis of the $6,500 or $8,000 from the credit — they’ll see it as just a nice perk for doing something they’d wanted to do anyway, perhaps with a little more urgency than they would have done it otherwise. …CONTINUED
2. Better houses. The current homeowners who choose to take advantage of the credit to move up while prices are low will be placing their current homes on the market, providing first-time buyers with alternatives to the distressed homes comprising much of the entry-level-market inventory. These sellers will also be motivated to compete with the distressed properties on pricing, and their homes will be in significantly better condition, on average, than the garden-variety short sale or REO.
3. Reset offset. As bad as this year seemed for home values, especially early on, the fact is that most subprime adjustable-rate mortgages (ARMs) actually reset in 2007 and 2008 — there was a lull this year in resets while we experienced the fallout in the form of foreclosures (and the absorption of them, in part, by credit-incentivized buyers). However, 2010 and 2011 are set to have a huge number of option-ARM resets. These are the loans that had a super-low minimum payment — lower even than an interest-only loan — and some project that about 1.5 million will reset, dramatically increasing borrowers’ monthly payments in 2010 and 2011.
Rates are low now, so the rate reset itself isn’t the problem. However, when these loans reset their payments often double simply because they go from requiring a 2 percent interest payment to requiring full payment on interest and principal. On top of that, the interest these borrowers didn’t pay in the first few years of their loans was tacked onto their balances, leaving the vast majority of them seriously upside down on their homes.
While many observers are warning about another potentially enormous wave of foreclosures, others feel that many of these doomed loans have already failed. Either way, those who think the tax credit had already done its job might look at it as stimulating buyers to offset and absorb the coming short sales and defaults of upside-down, reset-shocked option-ARM borrowers.
4. Market Laxative Effect. From the moment the original 2009 tax credit was enacted, many real estate insiders strongly suspected it would eventually be extended. Not so on this go-round. This extension was tough to pull off, and the White House was reluctant to get behind it with full force.
The buyers I’m working with are viewing this probably final extension as a proposition to "you know what or get off the pot." Those who have been toying around with thoughts of buying and selling will feel the pressure and either get serious or self-select out of this market.
Those who really want to buy … will. Those who really want to sell … will. I predict we’ll see a reduction in the numbers of unrealistically priced listings and deals falling out of escrow, as those who are still in the market are self-selected, serious buyers and sellers trying to get the credit while the getting’s good.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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