End of the buyer credits *except California.

What will happen now that the $8000 first time buyer’s credit is ending?

Well, according to the real estate  groups, apparently nothing. Quite surprising, considering how much they campaigned to get them! So, I’m not sure how a credit that was desperately needed to save housing when it started it suddenly a non event that won’t affect sales at all when it ends, but lets delve a little further:

Currently, Phoenix metropolitan area is having the 2nd best sales year ever. Examining current sales we find the following buyer facts: 40% first time buyers, 30% cash buyers. Both of these numbers are extraordinarily high by historical standards. Let’s examine each group:

1. First time buyers. We have had nine months of credits to motivate them to buy now, so it is safe to say, many have. In fact, in November, when the credit supposedly was ending, a huge dropoff in sales ensued. Only time will tell if first time buyers drop off signifantly, but it seems logical that they will. $8000 after all will buy a bit of motivation.

2. Cash buyers. Now, the truth is, the 30% cash buyers are actually buyers who did not record a new mortgage. It might seem logical to think these are wealthy investors, who can afford to buy into bargain properties for the long haul, but in many instances this is simply not the case. Hard money lenders will loan on any property with 30% down (albeit at some pretty steep terms, like 15% interest) but they will not record a mortgage. Rather, they will keep the property deeded to themselves until the buyer sells it later. This is in fact a very common way for home flippers to acquire property. As an active agent showing homes, more than half of the homes in many of my searches are flips. In fact, the number of listed rentals on the local MLS has actually gone down, hardly what one would expect to see if lots of long term investors where buying the properties.

So what happens next? Lets say we see a 1/3 drop off in new home buying, meanwhile investor flippers continue unabated. Sales numbers won’t show much of a difference, neither will listing prices. But if a home purchased at auction for $120K, and updated for $20K eventually sells for $130K, the market is in fact still falling. For all intents and purposes, the market will look fine, as more and more flipped properties show up for sale only to sit and wait.

So, this is my prediction: Crash part 2

A much slower version of the housing crash. If you are looking to buy, I would recommend waiting until at least late next fall. Give this new reality a good six months to start to set in, and then try to buy a nice flipped property at a loss for the flipper. Flippers are going to be extremely reticent to drop prices, but that makes little difference if we have more homes being flipped, than first time buyers looking for a home to live in. Meanwhile, as you can see from my previous post, foreclosures will continue for the foreseeable future. My personal goal, is to buy a home from a flipper that is tastefully remodeled, for just slightly more than a comparable foreclosure. Let someone else do the hassles and the work, and I can’t think of a group more deserving of a financial loss on a home actually.


About robertoaribas

Math professor, Realtor. 12 years of buying, selling, investing and managing rental properties. rock-climbing and salsa dancing. robertoaribas@gmail.com
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