Pending Expiration Of Tax Credit Causes Home Sales To Slow

November 6th, 2009 by Reed Allmand

According to an article in the Dallas Morning News, the Commerce Department reported that new home sales have dropped in September by 3.6 percent.  Some analysts expect that the drop off in sales is a result of potential homebuyers delaying their decision to buy a home due to the expiring tax credit which will end November 30, 2009.

The article said:

“It has been taking longer to close a transaction this year because it’s taking longer to get approved for a mortgage and to have a property appraised. Those time lags could make buyers nervous they won’t be able to complete the deal before the Nov. 30 deadline to take advantage of a tax credit of up to $8,000 for first-time buyers.”

In an effort to combat the effects of rising foreclosures, legislators are now considering extending the homebuyer tax credit through March 31 and then gradually phasing out the program over the year. Many critics call the tax credit unnecessary and ineffective in counteracting the effects of the foreclosure crisis.  The truth of the matter is that potential homebuyers are motivated to buy because the tax credit is seen as “free money.”  Homeowners facing foreclosure like the tax credit because it puts more potential buyers on the market.  And the mortgage industry likes the tax credit because they now have a “cash fat” market to unload a backlog of foreclosure onto. But will this tax credit really combat the foreclosure crisis in the long-run?  Probably not.  Many homeowners are buying homes using the tax credit, but if they are not financially stable they may eventually end up in foreclosure too. As we develop programs to encourage Americans to buy homes we need to make sure that those programs don’t become responsible for the next wave of foreclosures.