First-Time Homebuyers Buoy Real Estate Market

The housing market is getting a much-needed boost as first-time homebuyers rush to take advantage of an $8,000 federal tax credit that is set to expire Nov. 30, 2009.
By: David Bracken: RISMEDIA
The incentive is helping to slow the decline in home sales. In August, sales were down 1% over the comparable period last year, the smallest year-over-year decline in any month since late 2007. As Congress considers extending the credit, real-estate agents and home builders worry sales could slump again if it's allowed to expire.

A full accounting of the program’s popularity won’t be available for several months, but brokers say first-time buyers have been driving much of the activity in the market in recent months, especially for cheaper homes.

Kelly Cobb, a broker with Fonville Morisey Realty in Cary, North Carolina, said four of the six listings her office put under contract in the last month involved first-time buyers. Cobb said that as the deadline gets closer, she’s seeing more lower-end homes with multiple offers on them. “It has really, really fueled our market,” she said. “I think anybody who waited until now is going to pay top dollar.”

In order to qualify for the tax credit, a buyer must close on their property by Nov. 30. Brokers say in most cases that gives potential buyers about five more weeks to begin the closing process. The tax credit has been available since the start of the year, and for many families it has been too good to pass up. Terri Hutter and her husband, Fred Neumann, had been repaying credit-card debt and trying to build up savings in recent years. Hutter said the couple originally planned to continue renting for a year or two longer. “With that deadline I’m like, ‘Oh, let’s do it,’” said Hutter, who runs the culinary job training program for the Inter-Faith Food Shuttle. Hutter and Neumann expect to close Oct. 9 on a 1,360-square-foot home in Durham, N.C. The couple paid the listing price of $145,000 for the house and got a 30-year mortgage at a 4.875% interest rate.

Albert Blackmon and his fiancee, Rachel Blair also expected to wait a few years before buying a home. But Blackmon, who works as a Web developer in Apex, N.C., said the tax credit put buying a home within reach. The couple got a U.S. Department of Agriculture Rural Development loan with a 5% interest rate that required no money down. They paid $134,500 for a 1,250-square-foot home in Clayton, N.C. “We’re basically borrowing some money from some family members interest free, and when the credit comes back, we’re going to pay them right back and we have some instant equity in the house,” Blackmon said.

Those hoping to take advantage of the tax credit will need to have their financial house in order, as skittish lenders are closely scrutinizing a potential borrower’s credit and income history.

Tom Simon and his fiancee Tera Caldwell recently used the tax credit to purchase a home near downtown Raleigh. Simon admitted that getting financing was a long process, but he said that made him more confident that the couple could realistically afford the $193,000 house they ended up buying. Simon said the tax credit was not the deciding factor in the couple’s buying a home, but it did make them start seriously looking for a house sooner than they would have otherwise.

There’s still a chance that Congress could extend the tax credit in its current form or amend it. Some lawmakers worry about the program’s cost, which may hit an estimated $15 billion, more than double the amount projected in February’s economic stimulus bill, according to the Associated Press. Critics of the program also say it is artificially inflating demand at the expense of the taxpayer. “I would argue that it has the same effect of manipulating the real estate market that we’ve had with some other problems,” said Dallas Woodhouse, state director for the conservative group Americans for Prosperity. “There will be a day of reckoning for that.”

If the program is allowed to expire, real estate professionals will be watching closely to see what happens to home sales after it’s gone. George Pittman, CEO of Ammons Pittman GMAC Real Estate in Raleigh, said increased sales of lower-priced homes have not translated into more sales at the higher prices. Pittman said he would normally expect those selling $150,000 homes to then buy more expensive homes. “The thing we’re trying to figure out is why it is not snowballing up,” Pittman said. “It’s had some impact, but the upper end is still a bit soft right now.”

The tax credits have already had an effect on new home construction. As the inventory of modestly priced homes shrinks, builders are able to convince lenders that there is a need to replace them. The average cost of homes built in Wake County, N.C., was $165,000 in July, down from $195,000 during the same month a year ago, according the Home Builders Association of Raleigh-Wake County. There’s also been a spike in the number of building permits issued in Wake County in recent months. Tom Anhut, a division president in Raleigh for Toll Brothers home builders, said he believes the increase is a result of builders rushing to get homes finished by the end of November. “I think that there is a demonstrable increase in construction activity at the lower end right now because of that,” he said.

Tim Minton, executive vice president of the Home Builders Association of Raleigh-Wake County, said there’s no question the credit has helped stabilize a volatile market. “The question is, from a long-term standpoint, at some point that spigot does have to be turned off,” he said.