09/16/2010 06:47 am ET | Updated May 25, 2011

Let's Get Back The First-Time Homebuyer Tax Credit

The news from the National Association of Realtors for August is fairly brutal and speaks for itself:

"Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, dropped 27.2 percent to a seasonally adjusted annual rate of 3.83 million units in July from a downwardly revised 5.26 million in June, and are 25.5 percent below the 5.14 million-unit level in July 2009.

"Sales are at the lowest level since the total existing-home sales series launched in 1999, and single family sales -- accounting for the bulk of transactions -- are at the lowest level since May of 1995."

If there's an iota of good news from NAR -- and there isn't much more than an iota -- it concerns home prices. Nationally they seem to have leveled out, though individual markets can present an entirely different story:

  • The median existing single-family home price was183,400 in July, which is 0.9 percent above a year ago.
  • Single-family median existing-home prices were higher in 11 out of 19 metropolitan statistical areas reported in July in comparison with July 2009 (the price in one of 20 tracked markets was not available). However, existing single-family home sales fell in all 20 areas from a year ago."

None of the news from NAR is especially surprising. The end of the first-time buyer tax credit in April inevitably meant that sales would drop, the only question was by how much. Now we have an answer.

What's not understood, I don't think, is the importance of the first-time buyer market.

Multiplier Effect

It's usually said that first-time buyers make up 40 percent of all existing home purchasers. That's a fairly-impressive number, but as the expression goes that ain't all folks.

You have to think through the logic of the first-time buying process because there's a multiplier effect at work.

When a first-time buyer purchases a home they buy either a newly-constructed home or an existing property. When they buy an existing property what happens to the owners? They have to live somewhere and probably prefer an indoor location. So they take the money from their sales and traditionally move-up to a better property or move-over to a new location in another community. Some, of course, rent but largely that is not the case.

So now our seller -- the party who sold that existing home to a first-time buyer -- becomes a buyer and in most cases turns around and purchases from someone else. This second transaction would not be possible without the first-timer in the marketplace. You can see the process repeated to create a third transaction and perhaps a fourth.

Bottom line: If you don't have first-time buyers you don't have a growing real estate market.

The opposition to the first-time tax credit was largely based on the idea that it cost the government money and a philosophical objection to the government getting involved in the private sector.

But if you think about it the government does nothing but spend money. That's how the streets get paved, crimes are stopped and medical research is funded. Given the hideous condition of the economy, it surely makes sense to spend government money to maintain the job base and help local communities. Nothing is more local than real estate and so the first-time tax credit was an intelligent, targeted, rational response to a very difficult problem, certainly no less worthwhile than giving money to Wall Street banks and brokerages.

Note to Washington: Bring back the first-time homebuyer tax credit. Now. And make it permanent so there's certainty in the marketplace.

Posted originally with, an indpendent source of real estate, mortgage and foreclosure news and information.

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