First Time Homebuyer Tax Credit - Its Pros And Cons

First Time Homebuyer Tax Credit - Its Pros And Cons

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Initially, any incentive which would appear to encourage to kick start the economy would seem to be positive, and for the most part they are. But, they do occasionally backfire as 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 a rise in home sales by providing tax incentives to those who purchase within a certain period, at first, it appeared to be an amazing success. For the people who were purchasing, a potential $8,000 in savings was a significant sum so many took advantage.

With sales increasing 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.

However, once the tax credit period expired, things started to look a little different. Prices dropped considerably between May and June. Market analysis showed that 3 in 4 property classes showed declines of between 4.6 % and 6.8 %. The damaged foreclosed properties which saw an average increase of 5.9 percent 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 %, which was well below the 48 percent share in March. This reflects the federal tax break of up to $8,000 for first time house buyers provided that they were under contract by April 30th.

The increase in buyers during the tax credit period led to the sharp decline. People rushed to buy a house during this period while 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 concept behind the tax break was to encourage people to buy a property while otherwise they would not have. Instead, it appeared as though people who were taking advantage of 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 appear as though there was an increased demand in general. This demand in turn drove up house prices giving the appearance of a healthy market.

However, these sales statistics were artificial since instead of the market really seeing a rise 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 got over, the overall market demand began to even itself out to reflect the true figures. A summer slump would be seen where all of those who might have been purchasing a home had already done so. A lower demand lead to lower prices so those 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 could be certain that well see a peak again when the next tax break comes about.

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