Homebuyer Tax Credit May Skew Home Sales Figures in August

First-time homebuyers taking advantage of the $8,000 income tax credit under the American Recovery and Reinvestment Act of 2009 (more details on the program here) may pump up home sales in August.  The reason is that the tax credit only applies to purchases completed by December 1, 2009.  Because it can take a couple of months to go from a contract to closing, home sales contracts generally need to be signed this month in order to close before the December 1 deadline.

According to National Public Radio (NPR), the National Association of Realtors is gathering data to measure the size of the impact on home sales the tax credit is having.  Measuring such data carefully will be crucial for housing market analysts, as any significant boost in home sales due to the tax credit will be temporary.  Of course, there will be the usual cheerleaders who will happily pronounce that the housing slump is over once the August sales come out looking red hot [UPDATE 8-21-09:  Sure enough, here's The Wall Street Journal: Existing Home Sales Rise 7.2%.]  Consider that the same is being said about the auto industry due to the Cash for Clunkers program.  It will be true in both cases that a lot of the inventory overhang will be reduced, and that is helpful in stabilizing the “free-fall” that the housing and auto markets had been in.  However, that does not mean that there will be a sudden turnaround in overall demand.  Housing prices are still down siginificantly, and need to fall further to get back to the original, pre-bubble trendline.  Workers are still losing their jobs and will be unable to pay their mortgages – foreclosures will continue.  The deleveraging process will be a multi-year event.

Investors should be aware that the equity markets are rallying on any good news and generally ignoring the underlying bad news.  Thus, now is not the time to bet heavily against the market.  On the other hand, there is no need to recklessly chase this rally, as the economic data eventually will catch up (once these artificial demand boosters from the government end) and challenge the market’s rationale.

However, just as the Cash for Clunkers program received additional funding to carry on, one must always be aware of Washington these days, as its spending programs do have an enormous, if only temporary effect.  That spending will result in an increased federal deficit, but that is another story.  NPR reports that the first-time homebuyer tax credit may be extended:

Some members of Congress want to extend the credit. Last month, the National Association of Realtors testified before the House, saying the program has been so successful, it needs to be extended through next year. A bill has been introduced to stretch the tax credit through 2010 and has attracted almost two dozen sponsors.

Meredith Salsbery, a spokeswoman for Rep. Tim Walz, a Democrat from Minnesota, said that in recent days, the lawmaker has met with Realtors, home builders and constituents in his district who are calling for an extension of the program. “We’re working on it,” she said. Walz is a co-sponsor of the First-Time Homebuyer Credit Extension Act of 2009, HR 1933.

Because of the growing fiscal deficit, and the cost of the new health care program if it were to be passed, it is questionable as to whether Congress would be in any mood to extend spending programs.