As of today, the Homebuyers’ Tax Credit expires on April 30, 2010. Given the lack of discussion of the tax credit in the government and the media, small investors should assume the credit will be allowed to expire. When the Homebuyers’ Tax Credit expires, it will no doubt cause real estate prices, especially those in lower value areas, to fall and inventory to rise. Small investors should look to this credit as an opportunity to exit investments at the short-term height of the market.
Homebuyer Tax Credit Defined
The Homebuyer Tax Credit allows for any homebuyer to receive a tax credit of up to $8,000 for the purchase of a new principal home. With the average median house being valued at $200,000, the $8,000 credit represents 4% of the potential cost to a homebuyer. Additionally, based on a 30 year fixed mortgage at a 5% interest rate, $8,000 represents 7.5 months of mortgage payments. Given these statistics, it’s relatively easy to see why many future homeowners would act before April 30, 2010.
Lower Mortgage Rates and the Homebuyer Tax Credit
The expiring tax credit and record low mortgage rates create a perfect storm for real estate buyers. Not only can a consumer lock in extremely low interest rates for 30-years, but they can also expect their tax credit to cover closing costs and/or realtor fees. Consumers also have an unprecedented amount of bargaining power. Smart consumers will hold out for lower pricing, seller financing and other concessions that will make their purchase even more attractive.
Speculative Housing Boom
Small investors are not the only ones trying to take advantage of the expected run on housing up to the April 30, 2010 deadline. Many homebuilders stopped building houses altogether during the bust; however, in light of the expiring Homebuyers’ Tax Credit, these same homebuilders have decided to build two or three speculative homes in hopes to capture a few easy dollars.
Small investors, who own single family homes as rentals or vacant spec houses, should also be getting into the game. In many places, housing inventory is still extremely high, so investors should expect a tremendous amount of competition from desperate homeowners, new homebuilders and foreclosures.
Investors looking to exit their real estate investment should not miss this window. The time to buy real estate is now and consumers are well aware of the closing window. Expect prices to decline and time on the market to increase after the Homebuyers’ Tax Credit expires on April 30, 2010.
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Michael Cook - Michael Cook is currently a Real Estate Investment Banker for Wachovia. He and his partnerstarted their own real estate investment ...
