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Fitch: Homebuyer Tax Credit Will Boost Home Improvement Spending

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Fitch Ratings expects home improvement spending to increase 3.5% in 2010 over 2009 levels, partly due to an influx of home sales incentivized by the first-time homebuyer tax credit: Existing home sales are an important driver of home improvement spending, as owner occupants will often remodel existing home purchases and renovate homes before selling. However, not all types of homeowners awarded the tax credit will fit into this category, the rating agency said. After falling 13.1% in 2008, existing home sales grew by 4.9% in 2009 and are projected to increase 2.5% in 2010, Fitch said. In the first month after the deadline to sign a contract for the homebuyer tax credit, however, the annual rate of existing home sales declined 2.2%, according to the National Association of Realtors (NAR). Fitch noted the tax credit pulled sales forward in April but "left a vacuum of demand" that will persist through the summer. Nevertheless, home improvement spending should increase as a result of incentivized sales that will ultimate close under the tax credit's recently extended deadline. As the housing market works through foreclosure inventory, distressed sales are expected to drag down house prices and home improvement spending, Fitch said. Along with distress in the housing market comes a "negative homeowner mentality," according to Fitch director and lead building materials analyst Robert Rulla. Homeowners exhibit reluctance to remodel in times of price depression, as the perceived benefit of investing in a home diminishes with price decline. "Until we see home prices increase, Fitch expects homeowners to remain cautious" about improvement spending, Rulla said in a conference call today. Write to Diana Golobay.

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