Market Talk

My old Kentucky home (is worth an extra eight grand right now.)

Rumors circulating that Congress probably won’t extend the $8,000 tax credit for first-time home buyers, which is one of the things weighing on the market today (but, let’s face it, is ultimately the right thing to do.)

Research firm ISI Group has the details:

“There could be an agreement reached as early today on the Reid/Baucus amendment that would PHASE OUT (not extend, as we originally understood when the idea was first proposed last week) the home buyer tax credit,” ISI analysts said in the note. “The phase out is worse than a straight extension and probably worse for housing than the consensus.”

As we detailed earlier, recent housing starts and existing home sales data have been better-than-expected largely on the basis of the generous tax credit. Growth can arguably be attributed to the credit, meaning the recent trends become irrelevant if the credit doesn’t get extended.

Some market observers have even suggested a “cash-for-clunker like hangover” could hit the housing market if and when the credit gets phased out. As is evident in the auto industry, cash-for-clunkers didn’t exactly boost demand. It just pushed up demand so people who were already going to buy a car late this year or in 2010 decided to buy one earlier than expected.

The same may play out in the housing market. The tax credit alone may not spur people to go out and buy a house, but someone who’s already in the market for a new home may decide to speed up their purchase in order to get the credit.

Therefore, an increase in home sales associated with the credit is “mistaking activity for achievement,” Calculated Risk says.

“If we think of a balloon that contains existing home inventory and vacant apartment units, the tax credit is like pushing a finger on the balloon — the indent makes the balloon look smaller, but the volume of the balloon remains the same (the decline in existing home inventory is offset by an increase in vacant apartments),” blog says. “The higher rental vacancy rate is leading to lower rents, so the buy-or-rent decision will favor renting once Congress removes their finger from the balloon.”

(Photo: Library of Congress)