Zillow cheif economist speaks about new home buyer tax credit changes

Did you know that on-line home valuation monster Zillow.com has a chief economist? I like that they do because I feel opinions like his are market driven and not reports written for stock analysts.

Read New Homebuyer Tax Credit Proposal: Impact on the Housing Market by Stan Humphries. In his post he writes "Until now, we've been predicting that home values will likely bottom in the second quarter of 2010. But the tax credit could change that substantially, for several reasons." Following the guidelines of supply and demand and points out that the tax credit will increase demand but the addition of move-up buyers now included in the incentive will have an impact on supply and ultimately home prices. For a move-up buyer to take advantage of the incentive, they must first sell their existing home. With the incentives in play, what will happen to home prices?

The extension of the tax credit to existing homeowners brings not just demand into the market, but also an equal amount of supply (i.e., they have to sell their home in order to buy another). The existing tax credit to first-time home buyers was pure demand. Every buyer that was spurred to enter the market helped push inventory levels down by increasing demand relative to supply. With the existing homeowner tax credit, current homeowners are trading homes between themselves. What will be interesting to see is whether this game of musical chairs unfolds in an orderly fashion (i.e., some homeowners buying a new home before selling theirs; others doing the opposite) or whether skittishness about the market will lead more homeowners to try to sell their home first before buying a new one. The latter scenario could lead to more near-term supply than demand, which will push inventory up and prices down.*

My response:

You make some good points but I think your insight about inventory levels increasing and prices decreasing could be a book in itself. I would compare it to using software to predict storm paths like hurricanes, there are so many variables that it would take years of theory development to draw any viable conclusions. Now that we are adding a human element to the equation, get ready to be stymied.

Our growth in the Raleigh, NC real estate market has taught me an important fact: New construction will win 90-95% of the time when in direct competition with re-sale properties. People here who put their homes on the market for no other reason than they want to take advantage of the tax credit will not have a major impact on prices. They lack the motivations that many current sellers have and I don't expect they will add much downward pressure on home prices in Raleigh.

Even when our market was moving at a faster pace, our volume of new construction homes kept re-sale prices in check. Builders are adjusting their pricing through the margins they charge and the type of inventory they build. New homes are cheaper now than in 2006 and will continue that way for the next few years.

Only pocket areas of high desirability really saw bloated appreciation.

My prediction for Raleigh:

Prices will stay flat through winter with small, incremental increases through 2010. An outstanding year to buy in our market for individuals that will live in their home at least 3-5 years.

(Part of my thinking stems from forecasts of 3.5% growth/year through 2025).

This post was originally written for my regular blog. Raleigh Real Estate News. You maye read more available stories at http://www.gravesrealtyassociates.com/raleigh-real-estate-news-blog/

*Stan Humphries.New Home Buyer Tax Credit Proposal: Impact on the housing market. Zillow Blog. 11/06/09. http://www.zillow.com/blog/new-homebuyer-tax-credit-proposal-impact-on-the-housing-market/2009/11/05/#comment-192965