Will the HOUSING STIMULUS, $8000 HOME TAX CUT, revive the HOUSING MARKET?

Obama's economic stimulus package was approved by the US house of representative and in all likelihood, the senators will now vote on it and after the President's signature, it will become into a law. While the exact details of this stimulus bill, in particular the details of $8000 home tax cut are yet to emerge (e.g. details like whether the tax credit is refundable, what does a 'first time home buyer' exactly mean?, what are the income limits to be eligible for the home buyer tax cut, etc.) there is already a question staring at our face - How far will this $8000 first time home buyer tax credit actually help the ailing US housing market?


update:Read my latest post on $8000 first time home buyer tax credit-details explained for latest updates.

Let me first start with some concrete numbers but some slightly incorrect logic. According to a post on calculated risk, It is forecast by economist that home prices will fall another 25% to 30% in 2009. Not that economists are always right, but certainly rising unemployment and worsening economy provides us some rationale to believe the above prediction. So lets assume that the house prices are going to see a drop of another 25%. Now what is the average cost of a house? around $150,000?? or $200,000? In any case $8000 is going to be around 5% of this value. So does that mean that this housing stimulus bill will roughly help housing price by around 5%?

The above logic was obviously hasty and has two flaws. First, the home buyer tax credit is available to only first time home buyers. I guess there is a big chunk of home buyers which are not first time home buyers. Thus the above estimate of 5% is actually an overestimate. But wait, there is also one more flaw, another important point that the above logic misses - the housing stimulus or housing tax credit is going to have time limit. So there will be several more first time home buyers who are going to say " well, we are going to buy a house sooner or later anyway - so why not buy it within the specified time limit to get the tax credit advantage?" I think this type of feeling is going to have a lot more positive impact on first time home buyers and will actually cancel the effects of the first fault in the above logic.

In conclusion: I do think that the housing stimulus is going to help fall in house prices maybe by 3 to 4% (optimistically). So it is a good idea but dont expect miracles from it. The effect of the housing stimulus would be even greater if the criterion to be a first time home buyer would be relaxed a little bit in order to include a large people who are actually looking forward to buy a house to 'stay in' (as opposed to buying property just for investment).

update:Read my latest post on $8000 first time home buyer tax credit-details explained for latest updates.

Feb 16, 2009

3 comments:

Anonymous February 16, 2009 at 7:42 PM  

I pay my bills ontime, I am not a first time home buyer... BUT, I'm building a home 3000 sqft bigger than my last house. Im putting 20% down and Im wondering, where is my HELP? I dont have a foreclosed McMansion, I dont have bad debt, and Ive purchased and sold several homes in my time.

WHATS IN IT FOR PEOPLE LIKE ME? I'd like some rebates, I'd like some credits. WHERE in the world is the credit for people who take care of the bills and livelyhood?

Anonymous February 17, 2009 at 5:10 AM  

Is it also possible to think some will consider this "refundable rebate (my guess)" when purchasing a house and think they can afford more than they actually can?

Just mentioning this b/c I am having to convince my wife that this isn't the case...LOL... so I know there is one out there that does this this :o)

Many do not understand (especially 1st Time Homebuyers) that you have to refinance to lower your monthly payment.

Then again, much of this thought is coming from me having to explain this to my wife so maybe this is mostly isolated.

Anonymous February 24, 2009 at 4:24 AM  

Anonymous...what's in it for you is the same thing that's in it for me...the value of your house stops plummeting. I don't think people realize how important this is.

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