This was easy to predict: There is already an effort in Congress to extend the $8000 tax credit for first time buyers (which expires Nov. 30, 2009) to buyers of ALL houses in 2010.
There will be some form of rebate in the year 2010 because the real estate industry will continue to languish, and Washington will continue to tamper with our industry.
Since Washington is not willing to wait for the economy to "right" itself, please don't be surprised when our industry must "pay the piper" for extracting all the buyers out of the market years before they were planning to buy.
Any veteran of the auto industry (myself included) can explain to you why INCENTIVES (called REBATES in the auto universe) become ADDICTIVE to both buyers and sellers. And why it disrupts the natural rhythm of an economy trying to heal itself.
The idea behind incentives is this: Have a firm end date so that every buyer will rush out with a "last chance" mentality to buy. Keep it a big secret if you intend to extend or enhance the incentive.
And it always works like a charm.
If rebate ENDS on November 30, you have pulled buyers who WOULD have bought in December, January, and beyond.
Will this happen to first time buyers at the end of 2009? Yes it will. And it will clog what is already a strained mortgage industry now operating at far beyond capacity.
The problem with incentives is this: Business dies for the next few months. And rehab is never fun.
Then the inevitable: LIGHT BULB! Let's offer another rebate because, jeepers, if it worked last time, it'll work again this time.
And the cycle continues...
Why is this kind of ECONOMIC ADDICTION bad for the industry? Because:
- Buyers become addicted, incentives lose their impact. Buyers come to expect incentives and will not even consider a purchase without some sort of rebate
- Sellers become addicted because they need continual rebates to keep buyers in the market.
- Incentives distort the real value of what is being purchased.
- Incentives place an additional burden on buyers to constantly monitor how much "funny money" entitlement is attached to the purchase.
- Incentives are actually a bonanza for the tax man because incentives keep prices higher (higher property tax for real estate, higher sales tax for autos)
- Just like taxes, incentives are used to manipulate buyer behavior instead of allowing the free market allocate resources.
- Incentives invite fraud. Let's just be honest. How many people out there (who are not really first time buyers) are going to figure out a way to cash in? That's what always happens when the Feds dish out free money...much of it goes to fraud and monitoring fraud.
- No one wants to live through the rehab. What happens when they turn off the faucet and there are no more incentives? Can you say major pain as the market "adjusts" to reality?
Unless all of the inventory out there somehow disappears, there will be hell to pay when the music stops.
Will real estate tax incentives turn into a permanent addiction ( like exists in the auto industry?) Would you rather have natural healing? Or a short high, deteriorating health, and a painful rehab?
Bank on this: There will be a major push to extend the housing tax credit later this year.
That may not be a good thing.
Written by Janet Guilbault, Mortgage Banker/Broker based out of the San Francisco Bay Area
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