April 19, 2010
This month, Jamie Watt and her fiance Ben Arnold expect to own their first home, a three-story townhouse in Maryland with a deck for entertaining and a brand-new kitchen with a stone countertop.
Whether enough first-time buyers like them come forward in the next few months could determine the fate of the housing market's 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.
"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."
Low rates and prices
It's not just the tax credit that has first-time home buyers such as Watt and Arnold dominating the spring housing market. Interest rates are hovering around 5 percent on a 30-year fixed-rate mortgage, and home prices in many markets have fallen to levels that make purchasing as affordable as renting.
Jason Miller of Premier Real Estate Services in St. Cloud says the homebuyer's tax credits certainly boosted sales, but they are not the only thing that carried the market recently.
"The bottom line is I don't think we're going to see a drop-off where everything just freezes and everything goes away," he said.
First-time buyers generally tend to increase as a share of buyers during recessions, but rarely have their numbers been this high; 47 percent of buyers in 2009 were first-timers, a record high, according to the National Association of Realtors.
That's higher than during the 1991 recession, when 44 percent of buyers were first-timers, and the recession of 1981, when 44 percent of buyers were also first-timers. Compare that with the housing peak of 2006, when 36 percent 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 the data from March and April as first-time buyers close on housing contracts before the credit ends.
In St. Cloud, the number of singe-family homes sold in the five-city area in March increased to 87 from 62 in March 2009, according to the St. Cloud Area Association of Realtors. And how much they sold for jumped, too, from a median of $131,000 in March last year to $136,000 in March this year.
Signs of pickup
Nationally, there are signs the credit is helping. Contracts for previously owned homes jumped unexpectedly in February, with the seasonally adjusted index of sales agreements rising 8.2 percent 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.
Miller in St. Cloud said a little-known fact about the tax credit is people in the military have until April 30, 2011, to buy a home. They have more time because they may have been away in service while the tax credit program was going on.
Still, luring first-time home buyers now is especially vital to building momentum, because interest rates are expected to be around 6 percent 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."