31 AugNext Round of Home Buyer Tax Credit is a Bad Idea

Coming from a mortgage lender you might expect that we would be hopeful, even anxious, about a new home buyer tax credit, right? Well, not us and here is why…

Each time the government has announced a home buyer tax credit business increases temporarily. After the expiration of the tax credit the buyers seem to disappear, but why? Here is our unscientific guess as to what happens. Each time the tax credit is offered the buyers who were barely considering purchasing some day are now immediately interested in getting the process started. That is exactly what the government is hoping for, so what is the problem? The problem is that they are taking the natural future stream of business and pushing their motivation sooner than what was natural for that buyer. Now we have a bunch of people cramming their home purchase into a time frame that the government is mandating in hopes it stimulates the economy just to see a huge slump following the tax credit expiration.

July 2010 Existing Homes Sales Drop

The National Association of Realtors released last week that existing homes sales dropped 27.2 percent from June to July 2010.  The cause?  The expiration of the $8,000 tax credit.  So what is to blame?  Is it the chicken or the egg (in case you are curious here is the answer); the offer of the tax credit or the expiration?

The Houston Association of Realtors put together a great post showing the expanded statistics from July 2009 to July 2010 (25% drop in sales since a year ago).

Do Incentives Help?

Yes…and No.

Here is a video from Dan Pink who has studies extrinsic motivators and has shared his research in his books and speaking engagements.  For those of you not interested in watching the full video here are a few bullet points:

• Contingent motivators (if you do this, then you get that) work in some circumstances but for a lot of tasks they actually dont work or do harm
• There is a mismatch between what science knows and what business does
• Rewards help the simple task with clear steps and narrowed focus

Is the Real Estate Industry/Economy Simple or Complex?

My opinion is that the real estate industry is quite complex and not something as simple as a step by step task that can be incentivized with good results.  Sure, we saw good results.  People knew that if I buy a house I get $8,000.  But, what has it done to the real estate market?  It has dropped even further than before the incentive was offered!!

My Opinion?

Let’s get back to normal…whatever normal is.  Let’s stop messing with the real estate industry by offering incentives and allow the market to dictate what happens and where we end up.  Sure, it will take some time but eventually people will start to buy for the right reasons.

But, hey…if you are a first time buyer and the tax credit does end up becoming available again, take advantage of it!  I am not suggesting that if it is not available to not benefit.  Heck, I will be telling all the first time buyers about it, when/if it does become available.  Just don’t hold your breath.

About the Author | Scott & Marla Wynn

Scott & Marla Wynn are mortgage lenders with a focus on education. We believe an educated customer is our best customer. The mortgage industry has complicated the process of obtaining a mortgage so much that most customers believe the best way to select a mortgage lender is to inquire about rates and fees. Although rates and fees are an important part of the mortgage process, there are much more important areas to be concerned with. Lending A Hand was created to pass along our experience, knowledge and research to YOU to allow you to become a more educated mortgage customer. If you are planning a home purchase or refinance and live in the state of Colorado, we hope you select the Wynn Team as your mortgage lender!