Home Buyer Tax Credit Continues to Influence Market Growth

The federal government’s extended and expanded home buyer tax credit continues to boost home sales throughout the United States, according to a report published by the National Association of Realtors. For the ninth consecutive month since 2001, pending home sales showed a marked increase.

According to a Dec. 22 NAR report, existing-home sales were up in November “as first-time buyers rushed to close sales before the original November 30 deadline. People hoped – but no one could be sure the tax credit would actually be extended by Congress. It was, and when it’s all said and done, about 4.4 million households will claim the tax credit before it expires.

The question is, will pending home sales be self-sustaining when the tax credit expires in April 2010? Housing market experts are warning there will be a natural drop in pending and actual home sales as the rush to take advantage of the home buyer tax credit wanes.

What is the Pending Home Sales Index?

The Pending Home Sales Index is a leading indicator for the housing sector. It’s based on pending sales of existing homes. A sale is considered “pending” when the contract’s been signed but the transaction isn’t yet closed. An index of 100 is equal to the average level of contract activity during 2001.

News of a sharp increase is based on contracts signed in October. The pending sales report published by NAR on Dec. 1, showed a 3.7 percent increase from September 2009. It was 31.8 percent higher than October 2008 when the housing sales crunch was sorely felt throughout America. In September the index was recorded at 110. In October, the index had increased to 114.1.

Celebrate, but be Wary

The market has been historically slow for the past year, so while the increase is good news, it is still reflective of a sluggish economy and a rebound-in-progress. NAR Chief Economist Lawrence Yun again credits the government’s housing stimulus package for unleashing “a pent-up demand from a large pool of financially qualified renters, much more than borrowing sales from the future.”

The Northeast saw the greatest increase in October – 19.9 percent above September and 44.2 percent higher than it was a year ago. The Western housing market didn’t fare quite as well. In fact, the index fell 11.2 percent from September to October. It’s still 21.9 percent higher than it was a year ago.

The inevitable end of the tax credit is likely to cause a dip in pending sales as buyers rush to lock in their deals. The American job market continues to be weak, and that is a major factor affecting home sales. While the federal stimulus money has helped, it will not completely correct the market alone.

“Still, as inventories continue to decline and balance is gradually restored between buyers and sellers, we should reach self-sustaining housing conditions and firming home prices in most areas around the middle of 2010. That would mean broad wealth stabilization for the vast number of middle-class families,” Yun said in the NAR report.

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