The Poor automakers needed help. So the government got involved in, not only a bailout, but also Cash for Clunkers. Once again the government has saved the day, no? I am sure, like me, you have seen all the empty Dealership lots. Boy they sure did sell a lot of cars huh? Good for them right?
Ummmm NO. There were delays getting payment from the government out to the dealers. It had a lot to do with clerical errors. So now the Dealers sold their inventory, but do not have cash to buy replacements.. That is cannibalizing the market place.
Than ‘the experts’ started to realize, as some had warned previously, that all they did was push people who might be buying cars soon, into people who bought cars right now. So now they have diminished the number of buyers, that would have come, in future months Cannibalizing their market place again.
So let’s recap. They accelerated their buyers through the pipeline, at the expense of future business, and they have empty lots with no cars to sell to the few people that are still looking to buy. Call me crazy, but that does not seem the best way to run a business. Unless you are looking to run that business into the ground.
So what does this have to do with Real Estate? While I am sure many of you have had the same thoughts, lets put it into words. The market collapsed, Bank lending froze, and the markets teetered on the brink of Collapse. The government had to act, is the concensus I am hearing, and find credence in. Not just for the Business’s directly affected, not just for the USofA, but for the entire Global Economy. Scary stuff, and maybe it is better to act on the side of caution and throw some cash at the problem.
But they just couldn’t stop there, could they. And while everybody loves getting something for free, be careful what you wish for (see cash for clunkers above.)
They came up with the bright idea to accelerate the home buyers pipeline with a nifty 10% First Time Home-Buyers Tax Credit (max limit $8,000.) YIPPIE, now people who could not previously afford to buy a home, CAN. WOOHOOO
But wait a minute. Didn’t we first get into this mess by lowering standards and giving loans to people who otherwise could not afford to buy that home? Why would we do the same thing that caused the problem in order to fix the problem? And now they want to extend & expand the program instead of letting it die.
I wish that was all there was to it, but it is not. There are far more things afoot in the market place right now.
The inventory level of homes for sale has been declining for about a year, 20% in Hudson, Florida. That’s a good sign right? And the number of properties under contract has increased dramatically. That’s a good thing too, right? Solid indicators that we are bottoming out.
NO IT IS NOT. In normal times it is, but we are in anything but normal times. The decline in inventory levels is just the quiet before the storm. The number of solds can be attributed to, in part, to the increase of buyers spurred on by the FTHBTC of 10%. The large number of homes under contrast, usually a dependable housing market indicator, is so large because of how long it takes to negotiate a Short Sale/ Pre-Foreclosure to closing. The numbers of distressed properties under contract, in my market are typically 2, 3 or 4 times greater than the number of distressed properties that actually sell every month.
Wish that was all there was to it, BUT……
Rumors are that the banks are intentional keeping inventory off the market to artificially inflate prices. The darkest of speculations puts the number at ~80%. 8 out of 10 homes in a banks portfolio may be sitting vacant and waiting to come on the market. There are a lot of distressed properties on the market, at least here in the Tampa Area where unemployment is around 12% in some areas. And to consider that only 20% of the banks inventory is actually on the market makes me shudder.
On top of that, Now we are beginning to see Strategic Defaults. This is people who have made the conscious decision to walk away from a mortgage because their house is so far under water they can rebuild their credit rating long before the value of the home returns to the original purchase price. And now some are beginning to speculate that 2010 will be remembered as the Year of Strategic Defaults, the likes of which we have yet to see.
So if you are buying a home because you think we are at the bottom, or because of the 10% FTHBTC, you might want to think twice, before you find yourself in the positions of the people now considering/doing strategic defaults.
EDIT 9/25: What I neglected to mention, was my county - Pasco Florida and, if I am not mistaken St Petersburg as well -arranged it so the Tax Credit can be used for down payment to help spur on our crippled real estate market. I know it is true in Pasco, St Pete is near, but out of my area, so I do not track it as closely.
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When did we stop believing in capitalism....supply and demand? Are we so uncomfortable with pain that we can't live through the consequences of our missteps? Sad!
seems to be the case Karen. While I believe in the free market, I do believe something had to be done, but now it has gone way too far. And all those companies that were TOO BIG TOO FAIL, are even bigger Now. They need to have many spinoffs in the coming months / years
Too big to Fail ==== Too Big to Exist
This must never happen again. But you know about never saying never too ;)
Daniel, I agree with you 100% on the Home Buyer's Credit Program. It is ill advised and only makes the problem worse in the long run. It increases the national debt and only serves as a short term narcotic to make one feel good for a short time while we dig a deeper hole for ourselves. Home ownership should be earned. it's should not be a government gift and it is not a right. I feel sorry for those people who were only able to buy a home because of the tax credit because many of those people are not financially ready or financially responsible enough for home ownership. An unintended outcome of this program will be that there will be even more foreclosures and people walking away from "their" houses in the future, just exacerbating and extending the problem.
It is not the tax credit that qualify these people to buy homes, they would qualify with out it. Captialism works when it is allowed to correct it self. It is when a self serving government or enitiy steps in and tries to artificially change the corrections that we get into a mess like this.
I believe a small, small minority of the people utilizing the first time home owner tax credit qualified due to the credit itself. Most first time home owners qualified, under the more stringent standards for loans these days, without the help of the tax credit. I do agree that an $8,000 incentive to encourge people to buy a home is not in the long term benefit of this country especially when you factor in the fact that only first time home owners will qualify and not all home buyers.
I reread the blog, and I realize some of the comments are very true about FTHBTC spurring sales in the rest of the county.
What I neglected to Mention, is that my County, Pasco Florida, and I believe St. Petersburg city have arranged it so the tax credit can be advanced and used as down payment. As a result we are seeing houses bought by people who otherwise would not be able to afford.
Showing once again, attention to detail is key in conveying a point, and All real Estate is local
And what is to stop those people who got the $8000 from doing a strategic default as you mention? I imagine you are right, with all the incentives of loan foregiveness and loan modification, homeowners have all the incentives in the world to default to get the free money. Seems like policy makers should have read up on moral hazard before these programs were announced.
Brian, thanks for stopping by, WOW. That is a whole nother level I had not even conceived of. Going through the hassle of buying the home, just so you can get $8,000 and than just default. Hope that does not come to pass
Hi Daniel. I am sure that you read the latest stats about how many first time home buyers it has helped. In fairness though... the government helps with VA loans too.
Quite true Lana but I put Veterans way outside my normal set of parameters for everyday joe's. Our vets have earned, and deserve no less than the best of everything. Sadly that is not the case most of the time.
I was against the Tax Credit from day one. I am against its extension, and strongly oppose the program being expanded.
has it generated more sales, aiding realtors? yes, But that has nothing to do with my principles against 'robbing peter to pay paul'
With the cash for clunkers, it is almost inevitable than within a year or 2 that there will be a big wave of car repos coming down the pipeline. Same with the $8000 tax credit, the government is again encouraging people with little to no money to buy houses. Fortunately (or maybe not), the lenders are only loaning money to buyers with great credit and finances.
I hope you are right, about your last sentence, Rob