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November 24, 2010

Potential Home Price Risk and the Impact of the First-Time Homebuyer Credit: A Cross-Market Comparison

In general, the effectiveness of fiscal stimulus in boosting demand varies along the different stages in a business cycle. This suggests that the tax credit may have been more effective in some housing markets than others since there are significant differences in the rise and fall of housing markets across the country.

And with the housing downturn stretching into its fourth year, markets across the country have indeed positioned along various stages of the cycle. Some markets appear to have moved beyond the contraction phase and onto recovery and growth, and yet many others fall into the mid-to-late-cycle phase.

Since buying a home typically represents one of the most important household investments, homebuyers will carefully assess potential price risk in light of local housing cycle conditions. For instance, in markets where home prices continue to decline fairly rapidly, a potential homebuyer is likely to find the benefits of waiting for a lower future price exceed the tax credit. Conversely, utilizing the tax credit is optimal for buyers residing in markets characterized by stabilizing to recovering home prices.

In this report, we find that the effectiveness as well as the sustainability of the homebuyer tax credit in stabilizing home price varies greatly across markets in different stages of the housing cycle.

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