The Post Tax Credit Era – Is now a better time to buy?

Here we are nestled between the expiration of the $8,000 first time home buyer tax credit (also the $6,500 move up credit), and the date by which those transactions must close, June 30th. So what does that mean out there in the real estate market of Northern Virginia and DC?

Well, I argue that it means a tough time for sellers, but what is possibly an even better time for buyers. The seller side is obvious, less demand in the market place means more pressure on their price, and more time on market, which puts more pressure on their price. The buyer advantage is not so obvious, but is also related to the demand.

The tax credit driven market was successful in bringing buyers out by the truckload, but in our area (Northern Virginia & DC) it created an extremely competitive environment in the under $500k price points. Home after home was receiving upwards of 10-15 bids within the first two days, and prices were escalating well beyond list. Buyers had little time to consider their home of choice and had to make decisions quickly, often stretching their budget and limiting their expectations of what their money should afford them. Sound familiar?

It was a bit crazy, and I will say it, possibly a bit irrational. With many buyers who needed the $8,000 credit in order to purchase not making the deadline, and frustrated buyers who just thought the credit would be nice and put in offer after offer going back to the sidelines will much of the competition be out of the game? With low interest rates and theoretically low prices this reduction in competition could actually be the REAL buyer opportunity of the next 10 years (of course this assumes we avoid a double dip in the market, which is still possible). Sure the $8,000 cash in your pocket now is nice, but in some cases it appeared folks were paying an extra $20k, $50, and even $100k over asking price in order to get the house and qualify for the credit.

Assuming you invested the full $8,000 credit you could argue that taking the $20,000 escalation was worth it over the long term. Had you saved the $20,000 off of the price and put away the difference in payment it would take a little over 6 years to save the same $8,000. Statistically speaking you probably sell the home in the 5-7 year range and not longer pay the additional $107 dollars per month on the mortgage. I make this argument to keep it honest, cash in hand can make it worth financing an additional sum.

The escalation is only part of the story. Take the competition out of the market and you begin talking about reductions in price. What if that $20,000 escalation instead becomes a seller accepting a bid for $20,000 less than asking price? That is a post tax credit swing of $40,000, and I’m not sure $8,000 in hand can out duel $40,000 even if it is financed over 30 years. If you were going to live in the house for the full 30 years, and leave the $8,000 invested over that 30 years then yes, perhaps. But statistically that is unlikely, on both accounts.

These are just thoughts. It does seem quite a bit slower out there, but it is yet to be seen whether the competition has really dried up, or if competitive bidding will continue. So far it seems as though plenty of investors are still on the prowl and hunting the same grounds as most would be first time buyers ($500k and below).

My advice to buyers who missed the credit is to keep at it. I have clients who actually could not wait for the credit to expire because of the intense competition and fervent pace.

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