Over the last year there have been major debates over the effectiveness of the Home Buyer Tax Credit. The major housing indicators agree however that the homebuyer tax credits – extended and expanded late last year – were a huge factor last month as new home sales soared 27 percent for March, a month over month rate not seen since 1963.
It was reported yesterday that new-home sales jumped to a seasonally adjusted annual rate of 411,000 units, reversing February’s record low and blowing past expectations of housing industry analysts. The National Association of Realtors reported existing home sales of 5.35 million units that is up 16.1 percent increase compared to a year ago.
“Undoubtedly, the tax credit is working,” said Bob Jones, chairman of the National Association of Home Builders (NAHB) and a home builder from Bloomfield Hills, Mich. “Builders are seeing a growing optimism among consumers.”
The real question is how big will the dip be following the expiration of homebuyer tax credits, which expire on Friday April 30th. An eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2010 and close on the home by June 30, 2010. First-time and repeat homebuyers are eligible for as much $8,000 and $6,500, respectively.
Fannie Mae economists foresee a plateau in activity by June. Most housing industry analysts see the job market and interest rates as the biggest motivating factors in maintaining any kind of momentum in home sales throughout the rest of the summer.
“The increased sales are very welcome news and sales will continue to improve, although we expect them to plateau in late spring and early summer when the credit expires,” said NAHB Chief Economist David Crowe. “Following that, the housing momentum will be carried forward by low interest rates, pent up household formations, excellent affordability conditions and a budding employment growth.”
“With the tax credit pulling forward some sales into the first half of this year, we expect sales to pull back in the third quarter,” the Fannie Mae report said. “If the labor market improves substantially, as we anticipate in the fourth quarter, home sales should rebound and begin a self-sustaining recovery without the help of a tax subsidy.”
But Fannie Mae reiterates that the current surge is coming off sluggish or weak home sales figures for January and February, resulting in residential investment having fallen in the first quarter after gaining in the third and fourth quarters of last year.
“We expect (residential investment) to increase modestly in the current quarter and going forward,” Duncan and Velz said. “For all of 2010, we expect residential investment to add just 0.2 percentage points to Gross Domestic Product — still an improvement after subtracting from GDP during the past four years.”