Home Buyer Tax Credits: Hitting The Wall at 60 MPH

Last Updated May 26, 2010 12:52 PM EDT

If you're a home buyer, times are very good, indeed.

The home buyer tax credits have provided a tremendous boost for the real estate industry:

  • Sales of new single-family houses were 504,000 at a seasonally adjusted annual rate in April, 2010, a 14.8 percent increase over the revised March rate and a 47.8 percent increase over the rate in April, 2009.
  • Existing home sales for April were at an annualized rate of 5.77 million, up 7.6 percent from March, and up 21.1 percent over a year ago.
Meanwhile, mortgage interest rates have fallen to a new 50-year low. How low are they? I refinanced to a 15-year loan at 4.25 percent last November. If I pay a little more than I did the last time, I can probably refinance that 15-year loan at 4 percent - or less. You can get a 30-year fixed-rate mortgage (providing you have equity and great credit) for 4.6 percent.

Truly, these are mind-blowing rates.

And yet, the home buyer tax credits effectively ended April 30, 2010, which is when you had to have your signed contract. Since then, the speedy recovery of the real estate industry looks like it's about to hit the wall at 60 mph.

In last week's survey, the Mortgage Bankers Association described the number of new purchase applications as "plummeting."
(Purchase applications are for those who need loans to buy property. Refinance applications and for homeowners who want to refinancing an existing loan.)

Since the third week of April, new purchase applications had fallen about 27 percent. That decline has continued into this week. It looks as though nearly everyone who was going to buy a home and could have qualified for a home buyer tax credit pushed forward their sale to write a contract by April 30.

And now? Well, that's the question.

According to David Stevens, head of the FHA, the real estate industry is on "life support." More than 50 percent of buyers got FHA loans in the first quarter, more than Fannie Mae or Freddie Mac, which Stevens said is the "sign of a very sick system."

"This is a market purely on life support, sustained by the federal government," he said at a conference in New York sponsored by the Mortgage Bankers Association.

If you want to know what's going to happen to the real estate industry watch these signposts of economic activity:

  • Unemployment. The number of new unemployment claims shot up last week, spooking the already-spooked stock market. If that continues, it will only worsen the outlook for real estate.
  • Interest rates. The junk-bond market went haywire last week, as the world decided a flight to safety was in order. Treasuries are selling for nearly nothing. All investors are doing is trying to preserve equity. Right now, 50-year low mortgage rates is good news for home buyers. But, it's a sign that everything isn't right. Rising interest rates will signal a return to normalcy, although that, too, will be bad for the real estate market.
  • Foreclosures. The number of foreclosures is rising again, as lenders kick more homeowners out of their temporary loan modifications. Rising foreclosures mean more housing inventory and lower home prices.
  • Rising inventory. As news of a better real estate market has spread, pent-up demand from sellers is pushing up the inventory of homes for sale. As this number goes up, watch for home values to decline.
We're not at the end of the road (except for the home buyer tax credits), but we might be about to hit the wall at 60 mph. Buckle up!

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Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com.
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    Ilyce R. Glink is an award-winning, nationally-syndicated columnist, best-selling book author and founder of Best Money Moves, an employee benefit program that helps reduce financial stress. She also owns ThinkGlink.com, where readers can find real estate and personal finance resources.