The Pros And Cons Of First Time Homebuyer Tax Credit

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

The first time homebuyer tax credit plan, for example, is one such example. Designed to create an increase in home sales by offering tax incentives to those who purchase 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 whole property market was looking extremely healthy indeed 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 little different. Prices dropped significantly between Could and June. Market analysis showed that 3 out of 4 property classes showed declines of between 4.6 % and 6.8 %. The only property class to see a rise was damaged foreclosed properties which saw an average increase of 5.9 percent in June. 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 house 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. During which time people rushed to purchase a house whereas they might have otherwise waited. Because those who might have bought later in the year have already done so, it means that demand has been removed from the market for that time of year.

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

A sharp increase in the demand for homes 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 giving the appearance of a healthy market.

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

When the tax period ended, 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 home had already done so. A lower demand lead to lower prices thus the people who were looking to sell their house were left stuck.

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

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