Saturday, October 31, 2009

Congress ready to extend the real estate bubble; Homebuyers' tax credit

Congress apparently intends to extend the tax credit now in place for first time home buyers:
Senate leaders have reached a tentative deal to extend the first-time homebuyers' tax credit that was originally passed earlier this year as part of the stimulus bill, Republican and Democratic sources told CNN on Wednesday.

The credit would be extended through April and a new credit of $6,500.00 would be added for existing homeowners to buy new homes.

[The following analysis was written mainly with the Central Pennsylvania real estate market in mind.]

While this news may be welcomed by the real estate industry, it contains hidden consequences. The real estate bubble burst for a reason. Houses were overpriced, lenders were overextended and the economy could not sustain the false prosperity. We cannot get rich as a nation by trading the same real estate with each other at constantly increasing prices. The government can reinflate the bubble only for so long.

The only real cure is to allow prices to fall so that the real estate inventory can clear. There are deals to be made and there is money to be invested, but that will not happen if the government keeps propping up prices and turning what should be a buyers' market into a sellers' market. I have personally witnessed sellers that stuck to their unrealistic bubble inspired asking prices because the tax credit program was feeding new buyers to them. I have seen first time buyers feel pressured into paying too much for a home (or into buying a home with defects) because of the approaching expiration of the tax credit program.

Buyers who see the immediate cash benefit of the tax credit often fail to realize that this tax credit is reflected in the price of the house.

With foreclosures at an all time high, this is supposed to be a buyers' market. We are bombarded with advertisements explaining how we can obtain good deals now at rock bottom prices. But it appears, instead, that we are seeing the worst of both worlds. Foreclosures continue at a record pace while prices remain high and unrealistic.

The real effect of the home buyer tax credit program will be to bail out sellers that paid too much for their homes during the bubble, while creating a whole new group of victims (the buyers) that will need to be rescued when the new bubble collapses.

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