Real Estate Stimulus in Retrospect

Last spring the federal government sprung the $8000 home buyer tax credit on the real estate market in an attempt to spend stimulus money and nudge the real estate market forward.  Many buyers took advantage of the tax credit and sales increased, even though prices haven’t really.  Then when it was apparent that the real estate market, especially new home sales, needed further resusitation, the $8000 tax credit was extended to April 30, 2010 and a new $6500 tax credit for current home owners who have been in their home 5 consecutive years out of the past 8 years was launched.  These homeowners now had the opportunity to buy one of those higher priced homes languishing on the market or to build the home of their dreams up to $800,000 and with very low interest rates (if they qualified for a loan).  Many people have taken advantage of these programs as well.  It has been a boon to the real estate market — but a temporary one, in my opinion.

Sellers Tired of Languishing Market?

So what will happen now?  Past posts on this blog have addressed this issue, but an update would be timely given that the clock is ticking on all the sales generated through April.  Many transactions have already taken place and new homeowners have the keys to their new home.  Congratulations new homeowners!  Builders have until the end of June to get all those new home starts closed for first time homebuyers and repeat buyers alike.  Sellers whose homes are currently available for sale have been making price adjustments to try to capture the attention of buyers who haven’t pulled the trigger yet.  Some sellers who would like to sell and have been sitting back waiting are putting their toes into the water, but they haven’t had a market reality check yet and many are probably too optimistic in their pricing.  This could have the effect of making homes with recent price reductions look more attractive, but it also increases competition for buyers.  Only sellers who have decided they must sell now and are willing to price their homes competitively will capture the buyers who are actively pursuing a home.  And those buyers know they are in the driver’s seat.  That isn’t going to change for quite awhile.  Even in a good market, all homes don’t sell.

Just what is median price?

But, wait a minute you say.  I’ve seen reports that the median price is going up.  Doesn’t that mean that sellers are getting more for their homes than they were in the past?  Not necessarily.  Here is how the dynamics of the recent market works.  Since the first round and second round of tax credits were aimed at first time homebuyers, the segment of the market that has been in demand has been the entry level home market.  In 2009 that meant that the median price of homes that sold were lower than if the sales distribution fell along a more normal curve with sales throughout all price ranges.  In Colorado Springs, the entry level market is primarily homes under $200,000 and definitely below $150,000.  The sales during the past year have been skewed to the lower end having the effect of lowering the median price.

Homes priced over $400,000 have a lot of competition because those are typically move-up homes in our market and there haven’t been many move-up buyers.  The over $1Million home market has been abysmal.  The middle ground ($200-400K) is a mixed bag since some first time buyers buy in this price range.  The good news is that by targeting first time homebuyers, former renters now own homes and the sellers of those entry level homes have had a lot of well priced homes to select from for their next home.  The sales of those homes has had the effect of increasing the median price this spring as sellers of entry level homes now have the opportunity to buy.  More higher priced sales brings the median price up.  The bad news is that about 1/3 of the sellers locally are either short sales or bank sales of foreclosure properties, so those sellers won’t be moving up into a nicer home.  They are back in the rental market.  So there’s not as much help for sellers of more expensive homes as we’d like to see even though the median price has gone up in recent months.  Those increases are not due to increased prices for sellers.  They are a function of what the sales curve looks like.

That brings us back to the repeat homebuyer tax credit.  If someone who has been in their home for the past 5 years or longer wants a nicer, bigger home, the government offered $6500 for them to take their shot.  Of course, all those underwater homeowners who purchased since late 2005 are out of luck.  Chances are they would have to bring cash to closing to sell anyway and are unlikely to move unless they have to.  Do you think the government stimulus plan architects knew that?  Their goal was to get homeowners who had equity in their homes to move that money to a new home thereby generating commissions to market professionals and increasing mortgages that can be bundled and sold to Fannie Mae and Freddie Mac.  An underwater homeowners best option may be to stay put, accelerate their mortgage to gain equity faster, and create a selling opportunity in the future.

Future Trends?

The next 3 months is the remainder of the best selling season in a lot of markets.  Once school starts again in the fall, people tend to stay put and sales slow during the cold winter months.  We are keeping a close eye on local activity in the Pikes Peak Region so we can try to anticipate what the future trend will be in 2011.  With the government financial incentives gone, sellers will need to create those in the marketplace to encourage buyers to keep buying.  If they aren’t willing to do so, they may as well stay put.  My expectation is that activity and prices will decline, with declining median prices once again, until buyers start feeling secure in the job market and we reach an equilibrium that starts to generate demand once again.  Classic economics.

We Can Help You!

If you are a seller sitting on the sidelines or a buyer who is uncertain what to do now, I work with a team of professionals who can help.  By understanding the underlying factors in the market and knowing our local market, we can provide you with the knowledge you need to make the right decision for you.  We love to help!

Don’t forget to come back here every week for updates on the real estate and financial markets.  And don’t forget restaurant reviews on Thursdays.  Tomorrow - where to get a great pizza!