Magazine article Economic Trends

The Homebuyer Tax Credit

Magazine article Economic Trends

The Homebuyer Tax Credit

Article excerpt

07.23.10

Efforts to aid the floundering housing market began in full force back in July 2008 with the passage of the Housing and Economic Recovery Act. The act created a $7,500 maximum tax credit for first-time homebuyers, though it required homeowners to repay the full amount of the credit over a fifteen-year period. Later legislation expanded the credit to $8,000 and removed the repayment requirement. Most recently, the Worker, Homeownership, and Business Assistance Act expanded the program even further by including existing homeowners who were purchasing new homes, allowing them to receive up to a $6,500 credit, and extending the deadline to enter a binding contract to April 30. Now that the tax credit has expired, the question emerges as to whether the programs were enough to jump start the housing market or whether they merely cannibalized future sales.

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Prices seem to have received a boost from the tax credit, as shown by positive year-over-year growth in the S&P/Case-Shiller Index and the FHFA Index's flirtation with positive territory. The year-over-year growth of the 20-city S&P/Case-Shiller Home Price Index climbed from its January 2009 trough of -19.0 percent to 3.9 percent in April, and the Federal Housing Financing Agency's (FHFA) monthly Purchase-Only Index has improved from a record year-over-year decline of -8.8 percent to its present -1.5 percent.

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Note that the path of recovery is proceeding differently across various regions of the country. Generally, regions with the largest price buildup prior to 2007 also saw prices tumble the most. The Pacific region was hit hardest, with year-over-year growth in the FHFA price index dropping below -20 percent in 2009. The recent uptick of 3.1 percent suggests a return to a more stable pricing environment. West South Central is the only region that maintained a semblance of stability during the recession, with home prices essentially remaining unchanged. The East North Central region, which includes Ohio, fell 1.1 percent below its year-ago price levels, slightly beating the national FHFA index, which fell 1.5 percent.

The tax credit also appears to have provided support to new and existing home sales. …

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