Wednesday, June 9, 2010

Homebuyer Tax Credit Payback – Home Sales Now Appear to Be Declining

The most recent release of the Mortgage Bankers Association’s Mortgage Application Index continues to suggest that, with the expiration of the homebuyer tax credit, home sales have begun to decline.

In order to qualify for the tax credit, a contract had to be entered into by the end of April. Through April, the most recent data available, home sales were rising as buyers rushed to take advantage of the credit. Therefore, the likely effect is that many sales that would have occurred in later months were pulled forward into the months of March and April. This shift of demand helped to bolster sales numbers over these months, but likely did so at the expense of future sales. This pattern is similar to what occurred last fall when the original credit was first set to expire. The “cash for clunkers” program also produced this effect, where auto sales spiked and then fell back in the wake of the demand that was pulled forward.

The purchase component of the MBA Mortgage Application Index and new home sales are correlated, which is why forthcoming new sales numbers for May and June will likely show a decline.

The same dynamic is present with existing home sales. However, in this relationship, there is a time lag due to the way existing home sales are measured. These sales are recorded at the point of closing. So there is a one to two month time lag between the mortgage application number and the sales number. Therefore, it is likely that existing home sales rose in May and may even do so in June, but the July number will probably start to show a large decline.

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