I’ve Got Some Theories About The Real Estate Tax Credit

I read this post from Jacob Roche about what has happened in housing since the tax credit expiry.  There are a couple of surprising aspects to what we’re seeing so far.  First, a look at prices (emphasis, mine)

What I found was that on both a raw and population-weighted basis, prices increased after the tax credit expired, by about 5% in both measures. Most interestingly, on a dollar basis, prices increased by a raw $9,766.77 and a population-weighted $5,280.89 — very close to the $8,000 credit. This is extremely counter intuitive. If the tax credit expiration effectively raises all home prices by $8,000, why would sellers raise their prices roughly another $8,000, and why would buyers agree to it? In some areas, like New York, DC, and San Francisco, prices increased by the tens of thousands. Also interesting is that some of the biggest price declines occurred in Texas, although removing Texas from the population-weighted data changes the average by only a small amount — the biggest percentage decliner in the list is in Texas, but it’s also the smallest city in the list.

via Real estate prices, post tax credit.

The post goes on to look at the sale data (again, emphasis is mine):

Number of sales gives the data another dimension however. Roughly three-fifths of the cities in the list saw fewer sales post tax credit, and the declines in sales were generally much steeper than any of the increases. It’s regrettable Trulia doesn’t give the exact numbers, making it difficult to estimate how much money is flowing in or out of the market, but one could at least make a rough guess that the price increases are being offset by fewer sales. Interestingly, a couple of the cities with declining prices saw increased sales.

Now I have some theories about this behavior, purely using intuition and my own read of buyer and seller psychology.  On prices, I think the sales price increase is a sign sellers know the market is not as liquid now as it was with the tax credit.  So as a result they’re looking to maximize the price paid.  I would’ve thought prices would’ve been higher under the tax credit because both buyers and sellers would treat the credit as “found money.”  What I mean by that is if you find money that you had no expectation of getting, you’re more likely to splurge – to spend on things you may not have thought of getting before, but since you have the cash you decide to get it anyway.  Apparently it didn’t quite work out that way.

As for sales volumes, that’s not a surprise.  We figured sales would be lower as the market becomes less liquid.  And Jacob’s point about money flow is a good one.  Because ultimately that’s what it’s all about.  So when pundits talk about Case-Shiller price increases, my first question is how many sales-pairs made up the estimation?  Fewer transactions at higher prices can still result in negative money flow.

Overall, I think the tax credit did more harm than good.  Prices offered and prices bid are moving further away from each other, thereby resulting in fewer housing transactions which are actually done.  The market is becoming more illiquid and the process will take that much longer to heal itself and for transactions to clear in a meaningful way.  Plus, how much money was spent on this and did it get us the outcome we wanted?

Don’t think so…



Filed under finance, government, macro, Markets, Way Forward, You're kidding

8 responses to “I’ve Got Some Theories About The Real Estate Tax Credit

  1. Pingback: Sunday links: malinvestment musings Abnormal Returns

  2. Greg

    I agree with your assessment. Tells me that the tax credt led to a seller/supply driven market. We also know that although credit terms were tightened that FHA was still giving away houses for free (3% down) with the 8,000 credit. Also note, at least in my area, realtors have essentially extended the credit, given 8,000 out of their commissions. This is not possible in low price areas but is in NYC suburbs where median prices are 700k or more. This could defiitely skew average price higher if happening elsewhere.

  3. Joe

    Instead of clearing more housing stock at existing or lower prices, the tax credit seems to allow sellers some breathing room to stick to their asking price longer, knowing that buyers are going to capture much of that $8K tax credit (economic surplus). The immediate effect of the expiration of the tax credit, encourages the buyer to raise prices so that “net price” is closer to what the seller had in mind to sell the house – in the short run.

    You kind of see the same immediate price behavior with “For Sale by Owners” where seller first switches from a traditional broker listing to selling it themselves. The seller wants to capture most of the economic surplus from the elimination of the typical 4-5% broker commissions.

    The buyer want’s a deal. He knows that the current asking price of a newly listed FSBO in many cases is what the seller would have netted if the house sold at the seller’s original asking price less commissions.

    So the buyer balks, and housing stock is not cleared at least in the short run.

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  5. Chris of Stumptown

    Have you considered maybe it is a case of apples and oranges?

    The tax credit was $8000 for first time buyers, $6500 for upgraders. It was limited to $800,000 houses and below. There were income requirements too.

    Bear in mind that an $8,000 credit on a $150,000 house is much more compelling than the same credit on a $600,000 house.

    So perhaps this statistic shows that after expiration of the credit, demand fell most in the lower priced housing.

    • But we’d expect that. Lower strata in the housing market are more elastic than higher, because amongst the higher income levels demand has usually tended to stay rather constant, regardless of conditions.

      There’s a lot of things we could delve into and analyze: location, income/price segments, new vs. older developments, etc. A closer look at the data is probably warranted to better understand dynamics and drivers, but at the end of the day, all we can do is work with the data we have and draw conclusions from it.

      • Chris of Stumptown

        I agree this is an interesting data point. Do you give this much weight?

        Also, when you say that buyers and sellers are moving farther apart, is this based only on lower volume? Maybe it is that the credit just brought demand forward.

        I agree you have to use the statistics you have, but it seems that there are very different implications of them and I don’t have the ability tell them apart. I wouldn’t hang my hat on it but maybe you have better data or judgment.

        As to what all this govt money bought, two things, pork to consumers and brokers. And it bought time for the banks to earn their way out of their hole which seems to fit with the policy objective.

      • Good question. I give it more weight than if it was just some press release from the NAR touting some of their usual gibberish. Not to say their data doesn’t have a purpose, but they lost so much credibility with David Lereah as their chief economist 4-5 years ago. In my mind, services like Zillow and Trulia were an outgrowth of the skepticism people harbored for data from places like the NAR during those late boom years. Some friends of mine have given me some ideas on how to develop new research/enhance what has been done, so it might help control for the things you mentioned before.

        Buyers & sellers moving apart: I’m referring to the gap between prices buyers are willing to pay vs. what sellers are offering to sell. Reading the original piece from Motley Fool led me to conclude the gap between the two sides of the market has gotten bigger, not smaller. So as a measure of liquidity, the after-effects of the tax credit point to the program being a failure because it didn’t help facilitate market healing in many locations, but made it worse.

        And I agree both on what it got us and the policy objective. Success lies in the execution however, and so far that has been, well, abysmal.

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