Tax Credit Temporarily Checked Falling Home Values

Written by: Steve Cook   Mon, August 9, 2010 Beyond Today’s News, Crisis Programs, Recovery Signals

Though home values in the United States continued to decline in the second quarter of 2010, the percentage of single-family homeowners with mortgages who are underwater fell to 21.5 percent from 23.3 percent in the first quarter and 23 percent one year ago., according to the Zillow Real Estate Market Reports.

In California, where both federal and state tax credits are available to some homebuyers, more than a quarter (27.8 percent) of markets tracked by Zillow saw increases in home values in the past year. Home values in five California markets have increased for the past five quarters, and four of those have increased by more than 5 percent since the second quarter of 2009.  Meanwhile, home values in Florida and Arizona continued to show dramatic declines, with home values in the Miami-Fort Lauderdale MSA falling 15.2 percent year-over-year and home values in the Phoenix MSA falling 11.8 percent.

“The double tax credits for some California homebuyers have certainly stimulated housing demand there and are partly responsible for the rapid – and likely unsustainable – rates of appreciation in many markets across the state. While there is some uncertainty about how home values will respond in those markets once all incentives are removed, it’s certain they can’t continue at their current rates of appreciation, but is unlikely they will re-test the low points reached in 2009,” said Zillow Chief Economist Dr. Stan Humphries.

“Nationally, home values are moving in the right direction as rates of decline continue to slow. There is a large unknown on the horizon, however, as these second quarter numbers are still heavily influenced by the federal homebuyer tax credits, which were available for homes under contract by the end of April. Home sales are declining significantly in the post-tax credits environment, but the impact of falling home sales on already-declining home values is yet to be seen. Recent trends in home values suggest the nation could reach a bottom in the latter half of 2010, but we continue to be cautious about the impact of declining home sales,” said Humphries.

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3 Comments For This Post

  1. Jim McCormack Says:

    There is no way that home prices have reached a bottom. I analyzed the data in the NAR Home Affordability Index (HAI) from 1/1989 thru 5/2010 and found that the Median of the Ratio of Median Home Price to Family Income is 2.92 and the Average of the Ratio of Median Home Price to Family Income is 3.07. The lowest reading over this same period occurred in 12/1990 at 2.654. Therefore, it is safe to say that from a historical perspective the typical price of a median home should be about 3 times the median family income. The 5/2010 reading was just under 3 at 2.965. The problem is that we are not in a “typical” economic environment – we have record foreclosures that seem to persist and 10% unemployment. Given that the lowest reading of 2.654 occurred in 12/1990 and that our current economic conditions are far worse than 12/1990, it is logical to conclude that the ratio should be below 2.654. If the ratio declines to 2.5, home prices will decline by nearly 19%. If the ratio declines to 2.5 and family incomes decline by 5%, home prices will decline by nearly 25%. Given that personal incomes are declining and that a 2.5 ratio is probably a bit optimistic, I believe it is very feasible that home prices will decline by an additional 30%.

  2. Taymere Says:

    Jim McCormack, Good analysis but it leaves out the fact that mortgage rates are so low. With rates so incredibly low a 15 year fixed isn’t much more expensive than renting and it fixes your housing costs forever. For owner occupiers who plan to stay put it’s a good deal.

    The FOMC announcing further QE today is bullish for housing. The Fed announcement is an example of how the Government can interfere. I think Treasury and Fed and GSE’s will eventually concoct a way to goose housing.

  3. Steve Cook Says:


    I agree with you on mortgage rates and rentals. In fact, last week I did a piece on rising rental rates. I should do an article on where the comparative costs to rent or buy stand today.

    The governmen can, and will, and always has interfered in housing, going back to the birth of the mortgage interest deduction in the early 20th century. Sometimes it works and sometimes it doesn’t. I think that the jury is still out on the wisdom of the homebuyer tax credits.

    Thankis for your comments.


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