Residential Real Estate and Home Sales and Real Estate & Retail

First-time buyer tax credit isn't moving pricier homes

October 17, 2009
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A funny thing is happening in the housing market: Buyers and sellers are finding out what a so-called balanced market feels like again, at least for homes under $200,000.

Buyers have fewer listings to choose from and have to act fast, and sellers in some cases are juggling multiple offers at or above asking prices. That’s because procrastinating first-time buyers are racing to collect an $8,000 tax credit before it expires Dec. 1.

Nationwide, about 40 percent of homebuyers this year are eligible for the credit, and the figure for locally based F.C. Tucker Co. is closer to 50 percent, said Jim Litten, the company’s president of residential.

The new interest among buyers is good news, but it does come with a downside: The incentive has not generated a hoped-for boost in sales of homes at higher price-points. About 30 percent of the sales eligible for the tax credit are foreclosures, meaning the seller likely won’t buy another home. Other sales involve former rental properties.

“Normally, if you bought a $150,000 home, that seller would buy one for $225,000, then that one buys for $350,000, in a stair-step progression,” Litten said. “There’s a disconnect right now. Buyers are not moving up.”

A debate is raging in Washington, D.C., over whether to extend or alter the tax credit, which applies to first-time buyers or those who haven’t owned a home for at least three years. So far, 1.4 million families have claimed the credit, according to the Internal Revenue Service, adding up to more than $11 billion in stimulus spending.

The National Association of Realtors is lobbying to increase the credit to $15,000 and extend it to all potential buyers.

But there are signs the housing market has stabilized and may no longer need such aggressive government intervention. Single-family-home prices rose for a third consecutive month in July, according to the widely followed Case-Shiller index of prices in 20 metropolitan areas. The 1.6-percent increase, reported in late September, is the largest for the index in more than four years.

Steady sales in the nine-county Indianapolis area have helped clear excess inventory. The number of available homes fell 16.3 percent, or more than 3,100 homes, in August, according to figures from Tucker. Marion County led the way with a 20-percent drop in inventory. About the same number of homes sold as did during the same month last year, but average prices fell 5.5 percent as low-priced homes moved more quickly.

Rob and Amber Stegall shopped around for three months before they paid $105,000 for a home in Franklin Township in late September. The couple plans to start a family and probably would have bought with or without the tax credit, but it did affect their timing.

They plan to use the credit to pay off the $3,000 loan balance on Rob’s car and install new hardwood floors and carpet in the house, which had been on the market since December 2008.

Rob Stegall is mixed on extending the tax credit.

“I’m not sure it would spur more growth than it has already,” he said.

Even if the credit goes away, other incentives remain for buyers, including historically low interest rates and home prices that still are depressed.

But failing to renew the credit could lead to a sales letdown like the one that followed the Cash for Clunkers promotion for cars, said Janice Kernel, a residential broker with Keller Williams in Greenwood.

New listings of starter homes are selling in days, sometimes with multiple offers, she said. The credit has helped boost prices, but deals on low-priced homes aren’t as good for buyers who don’t qualify for the credit.

Kernel hopes Congress votes to extend the credit or expand it beyond first-time buyers. But not yet. Wait for the very last moment, she suggests, so the sense of urgency among buyers doesn’t dissipate.

Central Indiana in August had a 14-month supply of homes priced between $300,000 and $499,000 and a 21-month supply of homes from $500,000 to $1 million. Homes above $1 million are languishing for an average of 56 months.

For homes under $200,000, it’s still a buyer’s market, but barely. Those homes averaged 6.7 months on the market, with six months considered balanced.

“There’s not a lot out there to pick from in the first-time-buyer range,” said Kernel, who has worked with nine first-time buyers over the last few months. “Some HUD homes are selling well above listing prices. I saw one listed at $66,000 that sold for $84,000.”

It was the tax credit for first-time buyers that finally put a base under the market, said Ryan Dorman, an independent real estate agent who runs an outfit called Pole Position Realty LLC that focuses on homes priced under $150,000.

“We were in a free fall,” said Dorman, who has sold to three first-time buyers in the last few months.

One of the sellers moved to Las Vegas, another downsized into a smaller home, and the third had been a rental—all reinforcing the notion that the tax credit’s benefits mostly are limited to the low end of the market.

Yet Dorman, who has helped build his business with an oft-updated channel on YouTube, fears another market swoon if the tax credit goes away entirely.

“Any type of incentive is good,” he said.•

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