Who is Really Getting the $8,000 Tax Credit in Austin?

As the November 30 closing deadline for “first time” home buyers in Austin and across the U.S. approaches, buyers are creating price bubbles in South Austin in the sub-$200K range. Perhaps other areas as well, but I work South Austin mostly so it’s the area with which I’m most familiar. We have one buyer who has now repeatedly lost out on homes below $150K in South Austin. Most recently, an offer of $5,000 over the list price still wasn’t enough to beat the other multiple offers. Which begs the question, who’s getting this $8,000 tax credit anyway? It looks to me like sellers in South Austin are getting some or all of it as buyers scramble to compete for a limited inventory of close in, affordable homes in South Austin.

There are currently 158 homes for sale in the 78745 zip code of South Austin (MLS area 10N for the most part). Of those 70 are pending. Normally, in a balanced market, we’ll see 1 Pending listing for every 3 to 5 Active listings. South Austin 78745 currently has a huge Pending/Active ratio of 70/88, or almost 1 Pending for every active listing. If we limit the search to homes with list prices below $200K, the ratio is 55 Pending to 41 Active, or 1.34 Pending sales for ever Active listing. That’s what I call an “inverted ratio” (greater than 1.0), meaning the market is absorbing homes faster than they are being provided by Austin sellers.

If we limit to the search to homes priced below $150K, the ratio is a monster 17 Pending/6 Active. That’s almost 3 Pending listings for every Active listing. Wow!

This means buyers in these high demand areas and price ranges have no negotiating power, and at least some of their $8,000 tax rebate is being given to the seller in the form of a higher price than would otherwise be obtained without this government interference in the marketplace.

So, as I stood outside a less than spectacular home this afternoon next to a flooded driveway with obvious drainage problems (which I recommended the buyer not pursue), with a buyer trying to stay below $150K and seeking the $8,000 tax rebate, I had to wonder out loud if I might be able to find a better deal for them in the the December-February time frame following this government induced off-season market surge. But that’s all I can do is wonder. I can’t advise with any level certainty other than to say that many of these homes are absolutely selling for more than market value, and a buyer should properly factor that into their purchase and tax rebate equation, and therefore not think of the rebate as an $8,000 rebate, but instead something less, perhaps even zero.

When the dust clears from all of this in December, the stats will reveal how many of these homes are selling at or above list price, and in the following months we’ll be able to graph the List/Sold price ratio and see just what sort of price bubble the buyer tax rebate is causing. I think we have a good chance of seeing the exact sort of let up that happened with car sales immediately following the “cash for clunkers” program. The rebate will be over, remaining inventory will be met with normal holiday season challenges, plus all the buyers will have been used up in the three months prior.

Conventional wisdom, and everything you read currently, says buyers better hurry up and get under contract before the end of October so they can close by the Nov 30, 2009 deadline. I’m not so sure. And it’s possible that a second round of this rebate will be put into play soon after this one ends. Chances are that that one could be an even bigger rebate, such as $15K, and any buyer, investors included, will be eligible. Which means we may be in the unfortunate position in January of telling an October $8K rebate buyer “Congratulations, you paid $8K over market value in order to get a $8K rebate on a home that you could have waited three months to purchase for $8K less with a $15K rebate.

Don’t we love government meddling in our economy?

16 thoughts on “Who is Really Getting the $8,000 Tax Credit in Austin?”

  1. These inflated prices may be true in south Austin and areas that are convenient to downtown, but we don’t have this kind of pending to active ratio everywhere. We have several listings in this price range that have not had a lot of activity mainly because they are in areas that are further out. Also, I think a first time home buyer in the higher price ranges above 300k is making a mistake to wait. The prices are at or below market, the interest rates are still low, there is still a lot of decent houses to choose from AND you get an $8000 credit. Why would these people wait?

  2. Another point to consider is if the seller is truly getting more money, or is he giving it back to the buyer by paying closing costs. In the Mansfield and Arlington area we have seen buyers getting FHA financing with 3.5% down, asking the seller to pay a significant amount of their closing costs, and getting the $8000. The return of the subprime borrowers is here. These people are paid with our tax money to get into a house with zero out of their own pockets. They might have somewhat better credit and finances, but they have no skin in the game. They might just as easily walk away in the future, than try fighting to keep their houses when times are hard. The sellers may not have to discount fairly priced homes, but their nets are not increasing equally with any rise in prices.

  3. Hi Scott,

    In South Austin at least, the seller is getting a higher price without concessions. The seller is benefiting from the $8,000 tax credit, in many instances, more than the buyer.

    I won’t have full stats on the price hikes until mid-December after all the tax credit closings have been posted in the MLS. At that time I’ll have solid numbers. At present, I can only report what I observe.

    Thanks for your comments.


  4. Cash-for-clunkers is a bit different. An ex-coworker of mine runs a great blog that discusses the car market in much the same way that you guys do (there are product plugs but plenty of great information):


    I’d highly recommend it if you’d like to see how this could potentially play out. The big difference in the two markets is that the federal government is not bulldozing a house for every house that is sold ala cash-for-clunkers, so there won’t necessarily be real scarcity in December. That said, pretty much everyone who’s planning on selling a house in that range could have dumped it on the market right now, and there could be a drought of homes in that price range until next summer. Time will tell.

  5. A while back you posted on selling the last home under 200K in Circle C. Do you think that in the not too distant future the same will be said of South Austin and City of Austin in general? Perhaps the incentive is just accelerating a natural process. As you noted in a more recent post, many are priced out of 78704. South Austin and East Austin are very close to the South Congress and Zilker excitement, without the high cost. I think the affordablity and lifestyle of 78745, 78723 are very attractive to many sensible buyers.

  6. Hi Tim,

    I like Dale’s auto blog. Well written and good info. Thanks for the link.

    I really hope they don’t extend the tax buyer credit. We need to start letting the market run its course, for better or worse. I don’t mind that we had the program, but I fear these incentives are causing too much of an imbalance in normal buyer behavior. The auto industry has suffered from this for years now, as they’ve allowed buyers to become addicted to only buying when a special deal is available. We don’t need that to become the case with houses.

    Hi Mary, yes, perhaps buyers are buying in to the last, best opportunity to get as close in as they can afford with good interest rates and the bonus on top of that. Time will tell.


  7. $8k is only 5.3% of a $150k purchase price. Someone who could afford to pay $140k can probably stretch a little and pay $150k if they really were in the market to buy and liked the house.

    This means that the tax credit is NOT increasing the pool of potential buyers, it’s merely encouraging them to buy now instead of waiting. In that sense, the prices aren’t inflated by any means. South Austin is a desirable area and in a tough economy people want good value, which those homes provide. They just weren’t willing to commit.

    I think this tax credit is intended to prevent the kind of market crashes that result from lack of confidence, where prices fall really low, buyers get even more nervous, and prices end up falling even lower and a bunch of sellers get foreclosed on.

    Whether the current buyers are overpaying is a different story, but that’s their fault for not doing the math, not the government’s

  8. I think it has little to do with the $8,000 Tax credit.

    I do agree that there is a lot of competition for homes in the SMALL area of South Austin. I recently had a buyer make several offers before finally being accepted for the 4th property.

    For her, the location was more important than the $8,000 credit.

    HOWEVER, If you go anywhere else (East of 35, Buda/Kyle, North of Austin, etc), the credit seems to have little effect.

    It’s a great “bonus” for those that plan to buy. However, for the most part, I feel that these people would be buying whether there was a credit or not.

    The credit allows up to 10% of the purchase price or $8,000 max.

    So in theory, the buyer would benefit most from purchasing an $80,000 home. Not all areas of the country have homes prices near this range, but imagine getting an $80,000 home for $71,000 and locking in a low interest rate. You could always move out in a few years and hold the home as a rental property.

    A $160,000 home is basically getting 5% off the price.

    A $200,000 home is 4% off.

    $8,000 is a lot of money, but the higher you go, the lower percentage of price it accounts for.

    The fact remains, there are still many houses that do not sell or take a long time to sell in South Austin. These are the homes that are run down, have foundation issues, or are hard to access, etc.

    The home still must comply with strict appraisal guidelines. So the idea that the purchaser is going to be paying above market is unlikely.

    I think that the area would be a fast moving area with or withOUT the credit.

    As far as WHO Really benefits:

    The Seller – Gets his/her home sold
    The Buyer – Gets to buy a home
    The Seller (again) – Buys another home or rents (thus allowing another seller to buy/rent, etc chain reaction)
    The Listing Agent – Makes a commission
    The Buyer Agent – Make a commission
    And not to mention everyone else that is involved in the sales process – Title companies, inspectors, appraisers, etc.

  9. Jim – I would not put it all on the shoulders of the first time home buyer (by definition, inexperienced). Any time the government (on any level) incentivizes behavior through a monetary reward, then it must accept responsibility for that behavior. Not putting a value judgment on the $8K program, but am holding the policymakers accountable for their actions. There is no question that this program distorts the market, one can only try to judge whether the distortion is beneficial under the short run and long run circumstances.

    I would guess that the biggest net beneficiaries of the $8K program, are those who benefit from the volumes of transactions – realtors, title insurers, appraisers, etc.

  10. > This means that the tax credit is NOT increasing the pool of potential buyers

    Hi Jim, I’ll have to disagree. We’ve closed a number of deals now wherein the the tax credit was the deciding motivation. We currently have two buyers under contracts, both renters, who would not otherwise be in the market right now.

    Finally, there is absolutely no way the market would be producing the stats I outlined above in mid-October were it not for the demand being generated by this incentive.

    Zach – Agreed. South Austin is enjoying a bump that’s different from the outlying areas. Not sure why that subset of buyers is most active, or, put another way – why do most of the qualified first time buyers posses sensibilities that lead them to better located areas? I don’t know why that is.

    Todd – yes, but those same beneficiaries make be suffering the post-rebate slack as well, so I’m not sure it’s a lasting benefit.

    Thanks for your comments eveyone.


  11. My husband and I have been discussing just that!!! I was watching the auto market closely around March trying to decide if I should buy a Saturn Aura (for cheap as GM went under)and use my vehicle for the kids’ car. I never pulled the trigger, but when the cash for clunkers came out I am sure the deals changed by almost as much as the rebate–in the dealer’s favor. I have seen the same thing in older Brushy Creek. I was watching the area closely because a friend was going through a divorce and I wanted to buy a rental I could rent to her while her kids finished school in the area. I watched homes sit on the market for weeks and weeks at pretty decent prices. Then prices edged up in April as usual, but they just kept going up and I am seeing homes listed at prices I would never even consider paying because I’ve seen the ups and downs over the years and this is a definite high for the area. ( Interestingly, the rental market appears to be hot too.) Maybe more people are moving to Austin-RR than we realize.
    The “no skin in the game” bothers me (I see foreclosures in the future)almost as much as the thought that plenty of folks scrimped and saved to buy a piece of the American dream (a house) and now we’re handing it out to those who didn’t for free. I would like to see limits on the next handouts. Maybe energy efficiency or size requirements on the house, or recepients have to have paid into the tax system for a minimum number of years.

  12. Hi Steve, I think you’ll agree that for someone who is stretching their budget like your buyers, renting is a better options. Anyone for whom a 5% difference in price makes or breaks their finances is coming dangerously close to falling behind on payments at some point. These people are no different than those who took out subprime loans a few years ago. For them too, $100/month made a difference between owning a house or going broke, and look what happened.

    Perhaps you should have followed your own advice from the previous blog post and advised them to find a cheaper property, or hold off until they’re more financially stable.

  13. Hi Jim,

    Current buyers are not the same as previous sub-prime buyers. Underwriting requirements are back where they should have remained all along and loans are being provided only to buyers who demonstrate a properly documented ability to handle to loan payments.

    These are good buyers who recognize the opportunity of 1) historic low interest rates and 2) $8K cash rebate.

    It’s night and day from the loans that were given to unqualified buyers in the past. And yes, a qualified buyer is better off buying in Austin right now than waiting and renting longer. Waiting for what and renting for what purpose?

    I’d advise waiting for anyone not secure in their job or who can’t keep the minimum three year occupancy commitment required by the $8K rebate.


  14. Renting doesn’t have to be ‘waiting’ for anything; it can often just be the best financial decision for any invidividual or family – even over the long-run. The fetishization of homeownership in this country has led to way, way, way too much of that kind of thinking.

  15. Hi Mike,

    I don’t disagree that home ownership isn’t for everyone. And the pool of people who might be better off as permanent renters is growing each year. Mainly because life has changed and we’ve become so mobile. You no longer get a job at the plant and work there 20 years. The average person owns a home 5 to 7 years, many for a much shorter time.

    This is why it’s so important that buyers analyze the purchase also from a strictly financial/investment perspective and make sure they can afford the worst case scenario.


  16. I have had a negative view point of the tax credit from the start. Giving $8000 tofirst time buyers is 90% of the time just going to benefit those who were thinking of buying an house anyway. I mean $8000 is nice but a mortgage is a huge commitment and considering the economic climate not many people are willing to commit or have the funds for it.


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