The Advantages And Disadvantages Of First Time Homebuyer Tax Credit

At first, any incentive which would seem to encourage to kick start the economy would seem to be positive, and for the most part they are. But, they do backfire occasionally since the markets react to the changing sentiment in unforeseen ways.

For instance, the first time homebuyer tax credit plan, is one such example. Intended to generate an increase in home sales by providing tax incentives to the people who buy within a certain period, initially, it appeared to be an amazing success. For those who were purchasing, a potential $8,000 in savings was a significant sum so many took advantage.

With sales up strongly, house prices in turn increased and the entire property market was indeed looking very healthy and with house prices on the rise there was every reason to be confident.

After the tax credit period expired though, things started to look a bit different. Prices dropped considerably between Might and June. Market analysis showed that 3 out of 4 property classes showed declines of between 4.6 % and 6.8 %. The damaged foreclosed properties which saw an average increase of 5.9 % in June was the only property class to see a rise. Some homes that were previously having 2 showings every day were now lucky if only one viewing was given every week.

In June, the share of home buyers who where first time buyers was 42 percent, which was well below the 48 % share in March. This reflects the federal tax break of up to $8,000 for first time home buyers provided that they were under contract by April 30th.

This sharp decline was created by the peak in buyers during the tax credit period. Individuals rushed to buy a house during this period whereas they could have otherwise waited. Because those who might have purchased later in the year have already done so, it means that demand has been removed from the market for that time of year.

The concept behind the tax break was to encourage people to purchase a property while otherwise they would not have. Instead, it appeared as though those who were benefiting from the tax break were simply bringing forward their decision to buy a property from later in the year.

A sharp increase in the demand for houses before the tax credit period finished in April made it seem as though there was a higher demand in general. This demand in turn drove up house prices making it seem like a healthy market.

However, these sales figures were artificial because instead of the market really seeing an increase in demand as it seemed, it was actually just a case of the same level of demand being pushed together into a smaller time frame.

When the tax period got over, the overall market demand began to even itself out to reflect the true statistics. A summer slump would be seen where all of those who might have been buying a house had already done so. A lower demand lead to lower prices thus those who were looking to sell their house were left stuck.

Even if the housing market does stay in a slump during the summer and the winter, we will be certain that we’ll see a peak again when the next tax break comes about.

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