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First-Time Home Buyer Tax Credit Works

Check out the latest from the respected Economists of the National Association of Home Builders:

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The First-Time Home Buyer Tax Credit Does Its Work

Recent housing data — including a rise in existing home sales and a decline in the new-home sales pace — demonstrate the stimulative power of the first-time home buyer tax credit.

As the Nov. 30 deadline for the tax credit drew near, data from the third quarter of 2009 was especially compelling in showing the credit’s impact on the housing market. Knowing that they needed to settle soon in order to qualify for the credit, first-time home buyers helped push existing home sales to a seasonally adjusted annual rate of 4.9 million in September, their strongest monthly pace since July 2007. That helped boost quarterly existing home sales by 45% over the second quarter.

New Home Inventories Continue to Improve, But Demand Remains Weak

For 29 consecutive months, home builders have been doing what they need to do in the face of weak demand by reducing their inventory of unsold homes.

New home inventories peaked at 572,000 in July 2006. In September 2009, they were down by more than half to 251,000, the lowest level since November 1982.

Housing Prices Up – for the Moment

The S&P/Case-Shiller 10- and 20-city seasonally adjusted house price indexes increased in June, July and August. Although both measures are still down on a year-over-year basis, 10.6% and 11.3%, respectively, their rate of decline has decreased in each of the last seven months.

In August, 16 of the 20 cities in the 20-city index saw house prices increase on a seasonally adjusted basis. The turnaround in house prices appears to be largely due to the first-time home buyer tax credit helping to stabilize and bolster demand.

Housing Starts Up, Building Permits Down

Housing starts rose a modest 0.5% in September to a seasonally adjusted annual rate of 590,000, up from 587,000 in August. The rise was powered by strong single-family starts, which rose 3.9% from 482,000 to 501,000.

The increase in single-family starts reflects the continued increase in the share of starts built for the owner. In more normal periods, about 20% to 25% of all single-family starts are built on the owner’s land or built by the owner as the general contractor. That percentage declined as speculative sales rose in the mid-2000s, but it has since grown beyond historic levels as building for-sale dropped off.

Builder Confidence Falls

Another signal that the housing market faces a rough road ahead is coming from the NAHB/Wells Fargo Housing Market Index (HMI) measure of builder confidence. The HMI, after inching upward for three consecutive months, fell one point in October to 18. All three components of the index — current sales, current traffic, and sales expectations — were down. The downturn in the HMI seems to be due to the expiration of the first-time home buyer tax credit.

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