Has The New Homebuyer Tax Credit Caused Home Prices To Rise?

Are homes selling for inflated prices due to the new homebuyer tax credit?

New and existing home Realtors and community developers are jazzed that the new homebuyer tax credit deadline was extended to April 30 for a valid contract (no later than June 30 to close). It’s definitely pulling buyers in that might not otherwise choose to purchase a home at this time. Many homebuyers are using the assurance of the tax credit as “collateral” to borrow downpayment funds from family that will be repaid with this credit.  On the surface, this tax credit appears to be a good thing.

But is this credit causing inflated home prices? A number of Realtors have seen home prices increase in recent months to take advantage of the tax credit bringing in buyers.  Banks have increased home prices, based on BPOs or appraisals, bringing in higher valuations. Buyers want to buy before the April 30 deadline and sellers and/or banks want to sell at the highest price. Not wanting to miss the tax credit, buyers are often purchasing homes at inflated market prices.

Rather than let the market stabilize itself, the new homebuyer tax credit may be causing an unsteady housing market. If the tax credit didn’t exist, buyers would wait to buy when they found a home they liked and could afford. In other words, each buyer would purchase when the time was right for them. The tax credit incentive, however, lures these buyers to purchase right now.

This is merely simple supply and demand. Because the housing demand is higher with the tax credit, home prices rise. You only need one or two sales of homes with price increases in an area to cause all area home valuations to rise, as nearby recent sales prices are a factor in an appraisers decision on what a home is worth in today’s market. As such, buyers would most likely get a better deal if they purchased after the tax credit expires. A better deal on a home means a lower mortgage, and this lower mortgage payment alone could offset any funds received from the tax credit.

Maybe we should let the tax credit expire this time. Then, we can let the housing market fluctuate as it will and, hopefully, rebound on its own.

Photo Credit: Sean Dreilinger at www.flickr.com