Housing Tax Credit to Drop Home Prices - Again

The $8000 Housing Tax Credit runs out tomorrow. Tomorrow night at midnight to be exact. Have you got your home? Have you made your purchase? Or, perhaps more importantly for those waiting until the last minute, have you signed the contract?

I read this article this morning about a $25 down payment on a new home:
http://realestate.msn.com/blogs/listedblogpost.aspx?post=1748382&_blg=1,1748382

$25 down payment, open late to get the contract signed, discounted upgrades and extra low interest rates. There are lots of reasons to buy a home before the $8000 tax credit runs out tomorrow night. And I'm not just talking about the 8,000, One Dollar bills to be had. There really are a lot of reasons to buy before midnight on Friday.

But my wife and I have chosen another thought process. It goes something like this:

When the $8000 Tax Credit runs out, and people stop buying housing to take advantage of the credit, what happens to home prices then? If a home that has been on the market for 'a time' (whatever that happens to be in your area), AND it has been discounted to intice buyers to take advantage of the Tax Credit, BUT it still hasn't sold ... What becomes the strategy? My guess? Yet another drop in pricing.

Yes, the $8000 Housing Tax Credit is going to cause yet another drop in home prices when it runs out. Owners (and home-owning banks and lenders) are going to find themselves with what remains of the homes on the market. This includes both new and used. They will find that even with a lower home price, and the option for buyers to get yet another $8000 off the house price, these homes are going to still be on the market. And their only options to sell will be to actually drop the home price.

So let's take a home that we were looking at buying in our local market. We were looking for a smaller home, something of a fixer-upper so we could take advantage of some 'sweat-equity'. We found two homes in an older neighborhood that interested us. The two homes were the same price: a very, very low $120,000.

Both homes had descriptions talking about the reduction in price because the owners wanted to get it sold. Both homes are still on the market today. When the housing credit runs out tomorrow night, what can these owners do to now move these houses? Lower the price of course. So now they'll drop another 5-10K to re-make them appealing to those who now can not get the tax credit.

So what's the difference? If the home is $8000 cheaper or if you get $8000 tax credit for buying a home that is $8000 more expensive than the first? Good question. For one - you aren't relying on a government payout to buy a house, but more likely, the majority of the people who get the tax credit aren't putting it directly into the home, they are using it for other purposes.

In the end, as this $8000 tax credit runs out, the homes that are still left on the market are going to have to make a difference and drop prices to entice additional potential buyers. We have chosen not to buy right now - we'll wait.