Buyers may score better deals by skipping out on the tax credit and waiting for home prices to fall.House shoppers will have to buy soon to secure an ultracheap mortgage and collect an $8,000 tax
To see why, let’s first review the incentives. For about a year, the Federal Reserve has been aggressively buying mortgage securities at generous prices to drive down yields and, by extension, to reduce rates on new mortgages. Those purchases end in March. Most economists, including Boston Fed chief Eric S. Rosengren, reckon that rates on standard 30-year
Congress has been propping up the real-estate market, too. In November, lawmakers extended and expanded a refundable tax credit (a rebate, essentially) for buyers. Buyers are given 10% of the purchase price up to a maximum credit of $8,000 for first-time
Economics students know that subsidies increase demand and raise prices. Longstanding perks for buyers — like the mortgage interest write-off and the artificially reduced down
They worked. Goldman Sachs reckons that government support boosted house prices by 5% last year — or rather, kept them from falling that much more. It seems reasonable to assume, then, that prices could lose 5% once the programs expire. And because economists believe the temporary incentives mostly persuaded people who were already considering buying to do so sooner rather than later, after the programs expire, buyers could disappear and prices could dip quickly. Potential buyers should consider whether they’re better off hurrying for the perks or waiting for the lower prices once houses lose their stimulus premium.
Suppose you buy a $300,000 house in February, and by doing so you forfeit a 5% price decline, or $15,000. You get the $8,000 credit, for a net forfeit of $7,000. Now suppose you put down 20% as a down payment and take out a mortgage for the $240,000 difference. The $7,000 you gave up was 2.93 points, when divided by the mortgage amount. In return, because you bought before the end of March, your interest rate is 5.16% (the current average) instead of 5.91% (the three-quarters of a point increase expected after March). Should you pay 2.93 points for a rate reduction of that size on a $240,000 mortgage? Use SmartMoney.com’s Points or No Points calculator to find out. You’ll have to assume a rate of return the buyer gets on investments under normal circumstances. I used 5%, and got a result of seven years. That’s the break-even point. If you plan to stay in the house for that long, you should pay the points — or in this case, you should buy sooner rather than later.
For a $500,000 house using the same methodology, buying early is like paying 4.25 points, which gives a break-even point of 11 years, 11 months. For a $700,000 house, it’s 4.82 points, which breaks even after 14 years, eight months. But things get tricky for pricier houses. The Fed’s buying of mortgage securities has mostly suppressed rates for what are called conforming mortgages. On single-family houses, these are loans of $417,000 or less in most areas and, for the moment, $729,750 or less in designated high-cost areas. For nonconforming loans, rates are already higher, so they might not rise much after March. Also, the $8,000 tax credit vanishes for houses that cost more than $800,000.
(thanks Shane for the heads up on this one)I am in agreement with this article. Right now the home prices are being propped up by the intervention. Goldman Sachs recently put out a report indicating that they feel the intervention is adding about 5% to housing prices. But what will happen when it ends and rates go up. What kind of effect will that have? Initially I don't think much will change. The current crop of buyers will still want a house and with inventory low that should keep prices steady. But it's not going to take a big drop in the number of buyers to swell the inventory. REOs are hitting the market at a increasing rate. If a percentage of the buyers drop out the inventory should creep up. But it will take time. Of course I fully expect another round of government intervention if the market starts to peter out again.