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XMFTheDoctor (52.26)

Real estate prices, post tax credit



July 10, 2010 – Comments (5)

A couple days ago I posted an article regarding the Boston real estate market after the tax credit expired in April. Sellers slashed their prices after the credit expired, and many pending sales even fell through as buyers expected the price crash and decided to wait. However, I also noted that spot checking showed mixed data in other areas and it was difficult to say whether this was localized or not. I got curious and went to Trulia, the article's source, and used their market trends information for each of the 50 largest states in the US, which I believe should offer a decent cross section of US real estate prices and let us see what's really going on country-wide. The results were somewhat surprising and counter intuitive.

My initial assumption was that prices would go down after the credit expired, or if they remained flat, the number of sales would at least be down. One could look to other successful incentive programs such as Cash For Clunkers or Cash For Appliances, but those programs are not comparable. Those programs give the purchasers a rebate of some form for trading in their current car, appliance, whatever, and purchasing a brand new retail product. As far as I'm aware, the consumer and seller are certainly free to negotiate the price, but I doubt, for example, that my local Honda dealer gave any serious thought to raising the price on all their new cars by $3,500-$4,500 -- the idea being that the buyer would get that amount in their rebate, the rebate and price increase would cancel out, and the rebate would be effectively transferred to the dealer and not the buyer. So in these programs, the buyers at least benefited, and whether the dealers saw increased, or just cannabalized (from future months), sales is debatable. 

My assumption was that the home-buying incentives would not work similarly, that home prices would fall after the credit expired because home-sellers, realizing their buyers would have an extra $8,000 to throw around due to the tax credit, would thus raise their asking prices by $8,000 in an attempt to transfer the incentive to themselves, and then lower the prices again once the incentive is gone. If prices remained stable, I expected to at least see fewer sales, as prices would be effectively raised, lowering demand.

For my research, I took my list of the 50 largest states in the US and used Trulia's market trends information on each one, looking at how prices decreased in percentage and dollar terms in the period of April to June 2010, versus the prior quarter. I also looked at the number of sales during this period. I ended up having to throw out three cities -- New Orleans, Seattle, and Tulsa -- because either the 2007 estimated population was missing from my list, or Trulia for some reason didn't have up to date price data. Additionally, Trulia offers raw numbers for the price change information, but only graphs for the number of sales information. I didn't want to try and guestimate the change on the graph, so I only noted whether sales were up, down, or flat (and even that should be taken lightly -- some of the ups and downs are very close to being just flat). I then averaged the dollar and percent increases, both raw and population-weighted.

What I found was that on both a raw and population-weighted basis, prices increased after the tax credit expired, by about 5% in both measures. Most interestingly, on a dollar basis, prices increased by a raw $9,766.77 and a population-weighted $5,280.89 -- very close to the $8,000 credit. This is extremely counter intuitive. If the tax credit expiration effectively raises all home prices by $8,000, why would sellers raise their prices roughly another $8,000, and why would buyers agree to it? In some areas, like New York, DC, and San Francisco, prices increased by the tens of thousands. Also interesting is that some of the biggest price declines occurred in Texas, although removing Texas from the population-weighted data changes the average by only a small amount -- the biggest percentage decliner in the list is in Texas, but it's also the smallest city in the list.

Number of sales gives the data another dimension however. Roughly three-fifths of the cities in the list saw fewer sales post tax credit, and the declines in sales were generally much steeper than any of the increases. It's regrettable Trulia doesn't give the exact numbers, making it difficult to estimate how much money is flowing in or out of the market, but one could at least make a rough guess that the price increases are being offset by fewer sales. Interestingly, a couple of the cities with declining prices saw increased sales.

The data, on the whole, seems to be similar to any other economic data out there right now -- mixed, and inconclusive. Increasing prices amid fewer sales seems like the housing market's version of what we're seeing with employment -- increasing wages amid increasing unemployment. I find it terribly interesting that the price increases are so close to the expired tax credit, which really doesn't seem to make sense. I want to say that prices are increasing because there are fewer sales, that the credit helped absorb enough inventory for prices to start going back up, but everything else about the economy says that's absurd and it must be the opposite, higher prices reducing demand.

I admit that I am not a real estate expert, and there are many other factors surely at play that I haven't considered. If you'd like to review the data for yourself, check Trulia's market trends pages, which follow the format of: I've also posted my spreadsheet to sendspace for anyone wanting to play with the data I've already compiled: Thanks for reading, and if you have any of your own insights, please leave a comment.

5 Comments – Post Your Own

#1) On July 10, 2010 at 9:55 PM, XMFTheDoctor (52.26) wrote:

My bad, the sendspace link is an earlier copy before I added some more data. The correct link should be:

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#2) On July 11, 2010 at 6:09 AM, outoffocus (22.86) wrote:

and used their market trends information for each of the 50 largest states in the US,

As opposed to the 50 smallest states?

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#3) On July 11, 2010 at 7:32 AM, rd80 (94.72) wrote:

The April - June time frame would still be influenced by the tax credit.

The credit expired on 30 April, but the end date was based on the contract signing date, not the closing date.  A significant chunk of closings in the Apr-Jun quarter would have been impacted by the tax credit.

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#4) On July 11, 2010 at 1:58 PM, XMFTheDoctor (52.26) wrote:

outoffocus: Thanks for the catch, can't believe I missed that!

rd80: I thought of that, but wouldn't a significant chunk also not be impacted by the tax credit, versus the prior quarter which was all tax credit? It's possible there was a last minute push in the April prices that would give the data enough skew to have higher average prices than the prior quarter. It would certainly help explain the roughly $8,000 price increase. Do you have any idea how long the period between closing and signing usually is? That may give some insight into how affected the data is. Thanks for commenting!

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#5) On July 25, 2010 at 5:28 PM, KTarquinio (< 20) wrote:

There are a several confounding factors that would make it difficult to determine the influence the federal tax rebate had on the value of a specific home.

The tax rebate could have exerted a greater influence on people buying lower priced homes. In order to gain the full amount of the rebate the home would have needed to be sold for $200,000 or less. Purchasers of higher priced homes would receive a smaller percentage of purchase price as a rebate than would buyers of lower priced homes. Therefore, after the rebate was over buyers of lower priced homes may have been more likely to drop out the market. This would increase the average sales price of homes sold in the second quarter.

Many homes closing escrow in the second quarter were in contract months before and still reflect the influence of the rebate.Even today some of the current contracts have not closed escrow and  reflect property that will receive the rebate.

California had its own rebate of $10,000 that started right after the federal rebate was over. Some Californian's were even able to take advantage of both rebates if they timed it right. California being the most populated state contributed to some of these recent sales.

Interest rates on home mortgages are lower today than in the first quarter. Perhaps sales prices would have dropped had interest rates remained at the higher lever of the first quarter.Lower interest rates for June compared with April would result in $700 lower annual interest costs for a $180,000 mortgage. Over the course of several years the lower financing costs could tip the scales for lifetime housing costs for some buyers.

Another possible confounding factor may the shadow inventory of homes held by lenders. Increasingly lenders are relying on short sales rather than foreclosures. This may influence the types of properties being sold.  

The rebate was limited to first time buyers. First time buyers typically buy lower priced homes. With this incentive gone many of these buyers are no longer participating in the market

Demand for homes typically increases in the summer due to high seasonal demand. High demand usually increases the price of any commodity. Therefore the increased values for the second quarters may be due to the increase demands of the summer season and would have happened whether the rebate existed or not.

There are many other factors that could have had additional influences that we are simply unaware of. 

 It would be interesting to know average price of similar homes closing escrow recently that will receive the rebate and the price of those that are not receivng the rebate.

I enjoyed taking a look at your research. Thanks for the time and effort that you put in to it!

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