Real Estate

The Tax Credit Hangover

**Wednesday, May 26, 2010
Written by Steven Hebert

More selection, less pressure, moderate prices and historically low interest rates - potential Tylenol for the expired homebuyer tax credits.**

Lafayette's real estate market experienced a fever pitch in April as buyers scrambled to take advantage of the extended, and expanded, U.S. Government Homebuyer Tax Credit. First-time homebuyers who put a home under contract by April 30 could qualify for a tax credit of $8,000, an extension of the stimulus program that expired in November of last year.

Some existing homeowners could likewise qualify for a $6,500 tax credit if under contract by April 30. Both groups have until June 30 to finalize their deals and close on their homes. Once closed, a simple amendment to their tax return will have a nice refund check on the way.

This increased activity was like a return to the good ole days of 2006, particularly this April, as 351 listings were put under contract and 262 homes sold in Lafayette Parish. To put this into perspective, in April of last year, 208 homes were reported under contract, and only 159 sold. In fact, there hasn't been any one month with more than 300 homes reported under contract since June 2007. Since then, the average number of homes reported under contract per month is 213. So, it's a bit of an understatement to say that April 2010 was a good month for real estate in Lafayette Parish.

After a slow start in January and February due to extremely cold weather and the Super Bowl, the market really took off. For the year, sales volume is up by 12 percent over last year, a pace that should hold through mid-year as deals put under contract in April close. This is welcome news in the wake of two straight years of basically flat real estate activity.
Unfortunately, not all the news is good. Even with increased sales activity, average home sale prices are down 8 percent compared to the first four months of last year. There are several reasons for this, including an increase in the number of distressed sales and new appraisal requirements and restrictions that result in lower appraisals and thus lower sale prices. There are also simply more homes selling in lower price ranges, and the first-time homebuyer portion of the tax credit brought many buyers out to see these homes.
Some numbers help paint the picture. In 2010, there were virtually the same number of homes sold in Lafayette Parish in the over $250,000 price range - 122 compared to 114 in 2009. Compare that to the difference in home sales under $250,000 - 488 in 2009 and 605 in 2010.  Most buyers this year are concentrated in entry-level, affordably priced homes, so higher price range sales activity remains virtually unchanged.

An unintended consequence of the homebuyer tax credit is the effect it had on home sellers. Sellers hoping to benefit from the increased buyer activity put their homes on the market in a similar fashion to those just after Hurricane Katrina. So even with the dramatic increase in homes taken off the market this year, active inventory has risen.

This time last year, there were 1,118 homes on the market. This year, 1,207 remain. This increase in inventory will continue to hold down prices for some time, which could actually be a good thing as buyers look for reasons to stay in the market in the wake of the tax credit.

But that's not the only reason buyers need to remain in the market. First of all, the tax credit did not enable sales to take place. Unlike the automobile industry's "Cash for Clunkers" program, where that tax credit showed up at the time of purchase to use for down payment or transaction cost, the homebuyer tax credit is received by buyers weeks or months after the fact. A nice bonus indeed, but this program didn't create deals that wouldn't have happened in the first place. In other words, the tax credit didn't enable an otherwise unqualified buyer to be qualified.
Today's buyers are operating in a market with more selection, less pressure since that the tax credit has expired, moderate prices and historically low interest rates. In addition, summer and early fall are traditionally better sales months in the real estate cycle. These factors should bode well to lessen a tax credit hangover in coming months.
It's easy to predict that home sales will be up at mid-year, probably somewhere around 10 percent. It's also easy to predict that sales will not remain at April's pace. What happens for the rest of the year is in question. Our market has seen a definite trend toward more affordable homes, so we can expect homes under $250,000 to continue to sell well. Although expired, the tax credit did build momentum that will carry over and give the market cause for a positive end to the year.
It's a little early to tell, but 2010 may be the year that sales begin to tick back up in Lafayette Parish.

Steven Hebert has been in real estate and construction all of his life, having begun cleanup work on his father's construction sites at age 6. He is now the COO of Coldwell Banker Pelican Real Estate, a nationally franchised, full service real estate firm.