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Will tax credit help first-time buyers ignite home sales?

Will tax credit help first-time buyers ignite home sales?


April 14, 2010

This month, Jamie Watt and her fiancé, Ben Arnold, expect to own their first home, a three-story townhouse with a spacious deck for entertaining and a spanking-new kitchen with a stone countertop.

As first-time home buyers, they’re part of a critical demographic shaping the spring housing market.

Whether enough first-time buyers such as Watt and Arnold come forward in the next few months could undermine — or stabilize — the housing market’s already wobbly recovery.Much rests on how tantalizing a tax credit of up to $8,000 will be to first-time buyers, but buyers must sign purchase contracts by April 30 to qualify. The same deadline applies to the credit of up to $6,500 for repeat buyers. Time is running out.After the spring flowers fade, many believe first-time home buyers could, too.

“I don’t know how many first-time home buyers have the money and jobs to be much of a factor once this tax program ends,” says Joel Naroff, with Naroff Economic Advisors. “The tax credit concentrated a year’s worth of sales into a six-month period. I think first-time home buyers will fade into their normal part of the market after this ends.”

Thousands of first-time home buyers — with weeks left to qualify for the credit — are now making harrowing decisions that could alter their lives.

For Watt and Arnold, buying their first home was a nail-biting wait to find out if they could get financing. There was falling in love with a house, then hoping the sellers would accept their offer. There was a counteroffer.

“The whole process is completely overwhelming,” says Watt, 27, of the $310,000 home they’re buying in Crofton, Md. “I can see us there at our little cafe table having breakfast in the morning. I can’t wait. It seems like a great place to start a life together and start a family.”

Low rates and prices

It’s not just the tax credit that has first-time home buyers such as Watt and her fiancé dominating the spring housing market. Interest rates are hovering around a low 5% on a 30-year fixed-rate mortgage, and home prices in many markets have fallen to levels that make purchasing as affordable as renting.

First-time buyers generally tend to increase as a share of buyers during recessions, but rarely have their numbers been this high; 47% of buyers in 2009 were first-timers, a record high, according to the National Association of Realtors (NAR).

That’s higher than during the 1991 recession, when 44% of buyers were first-timers, and the recession of 1981, when 44% of buyers were also first-timers. Compare that with the housing peak of 2006, when 36% of home buyers were first-timers.

Even with low interest rates and the temporary tax credit, home sales slipped in December, January and February, although most economists are expecting some pickup in March and April as first-time buyers rush to close on housing contracts before the credit ends.

Still plenty of worries

Anxiety about the housing market could keep some first-time buyers at bay.

Janet Koelsch, a Realtor with Coldwell Banker in Scituate, N.Y., says her first-time buyers are eager to buy but often afraid because of the horror stories they’ve heard about homeowners losing money in today’s tepid housing market.

“They’re really fearful. There’s a fear of the unknown,” she says. “But the stimulus package is allowing them to buy when they couldn’t before. I love their zeal. They’re excited; they’re like sponges, they want to absorb all the information. I get so emotionally connected to them. It’s the biggest thing they can do in their lifetime, other than having a child or getting married.”Some first-time home buyers say they overcame any anxiety because they didn’t want to miss out on the financial incentives.

For Michael Jennings, 27, of Wilmington, N.C., buying his first home in March took three months of looking at more than 15 homes. What finally pushed him to make an offer was the prospect that waiting too long would cause him to miss out on the tax credit.

Jennings, who works in the construction industry, went for a home with a wrap-around porch in an older neighborhood near a shopping center for $238,000, and his seller came down in price. He got a fixed 30-year mortgage with a 5.2% interest rate.

“The tax credit was a big factor. I wouldn’t have moved as quickly as I did,” Jennings says. “You really hate to miss out on that chunk of change, that $8,000. And this house had everything I was looking for. I’m very happy.”

To make the down payment, Jennings took out some funds he had invested in the stock market. He plans to use the $8,000 tax credit to replenish those funds.

A new breed of buyers

First-time buyers such as Jennings are more than typical home buyers. They’re also a unique demographic who are highly sought after by sellers. First-time buyers are pickier than move-up buyers. They’re more likely to find their home using the Internet than in years past, and they’re likely to have bigger down payments than in years past.

First-time buyers now live on the Internet: 93% used the Web as a search tool, compared with less than 1% of first-time buyers in 1995, according to NAR. Their average age is 30, putting them on the leading edge of Generation Y, a well-educated and savvy generation that wants quick responses and fast turnaround times.

They are also selective: They spend a median of 12 weeks looking for a home, while repeat buyers spent an average of 10 weeks.
Their median income is $61,600, they buy a house with an average value of about $156,000, and their median down payment in 2009 was 4%, up from 2% in 2005. In 2005, 43% of first-time buyers purchased with no down payment; in 2009, that had dwindled to 20%.

Realtors such as Jessica Riffle Edwards of Wilmington say they must work hard to reach out to this younger demographic. She tries to target the first-timer through a video blog, where she’ll sit in her BMW sedan and videotape herself talking for two to three minutes about various topics of interest.

“It’s exciting to work with them so they can have this place they can call home,” she says. “They’re making this awesome step, this first step of purchasing real estate.”

She believes enough first-time buyers will come forward before the tax credit expires to give a needed boost to the housing market.

“I am seeing a lot more interest, though, from first-time buyers in recent weeks,” Riffle Edwards says.

Signs of pick-up

Some signs of life already are being seen in housing sales, suggesting the tax credit is helping. Contracts for previously owned homes jumped unexpectedly in February, with the seasonally adjusted index of sales agreements rising 8.2% compared with January, according to the NAR. It was the second-biggest gain on record.

First-time home buyers “are critical for bringing down inventory. That’s what’s needed so we can go back to a normal housing pattern,” says Lawrence Yun, chief economist with the NAR.

An earlier tax credit that expired in November caused a surge in first-time home buyer sales.

This spring, he says, “We may see a very significant second surge,” although that’s likely to be followed by a drop-off in sales in June through August after the credit expires.

Still, luring first-time home buyers in now is especially vital to building momentum, because interest rates are expected to edge up to around 6% later this year, and that could act as a drag on home sales.

But some question the wisdom of using incentives to motivate first-time buyers for the spring housing market. Why drive up sales for a short time, critics say, only to have them fall off once the credit is no longer in place?

“I find these incentives to be stupid,” says Brett Barry, a broker with HomeSmart in Phoenix. “They’re artificially holding the market up and using taxpayer dollars. I don’t like it.”

Tax credit is fine but…

Some home buyers say getting the tax credit would be nice, but they’re not willing to buy a house just to get the financial incentive. They’re determined to wait to find the best deal — even if that means they don’t buy this spring.

Chris Rusnell, 24, of Phoenix, has been looking for a house for about a year, but it took awhile before he could clean up his credit and qualify for a loan. He’s interested in getting a bank-owned home because he thinks it will likely be a bargain. So far, he hasn’t found one in the right location. He’d also like a three-car garage to store all his tools.

“The tax credit is out the window. Who cares about that?” says Rusnell, a plumbing contractor and father of two boys, ages 4 and 11 months. “I’d like to buy in that time period, but it’s become evident it’s not going to happen in that time. I just want to get out of renting. It kills me every day sending a check out.”


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