Homebuyer Tax Credit Extension, a Mixed Bag for Investment Banks
Despite the positives of the extended first-time homebuyer tax credit, the lasting effects of the policy look to be uneven, according to several investment banks (IBs). The Royal Bank of Scotland (RBS) economists said in market commentary a fall in housing demand kept high through the tax credit may only have been delayed with the credit's extension. RBS acknowledged the continued rebounding house prices and home sales in August and September remain positive signs the increased demand may be helping to work down inventory and bring stabilization to prices. "To be sure, the homebuyers’ tax credit is providing some support to the sector, but an $8,000 tax credit in the context of buying a house is not exactly on par with a $5,000 check when purchasing a car or truck," RBS said. "In any case, with Congress passing an extension in the credit until next spring (in fact, the eligibility was expanded significantly), the fears of a hangover (a la Cash for Clunkers) can be put off for at least six more months." Economists added: "RBS continues to believe that the levels of home sales and construction were so egregiously and unsustainably low early this year that a vigorous rebound is in the cards for 2010." Deutsche Bank Securities sees potential in the tax credit to put a floor on house prices in areas with less severe fundamental problems like distressed inventory and affordability. But in some of these areas, Deutsche said it is difficult to expect a related increase in demand sufficient to counteract the overwhelming supply wave represented by foreclosures. The effect of the extended and expanded tax credit -- which researchers called "a blunt instrument" -- is likely to remain uneven across differing markets. "However, for the U.S. market as a whole, extension of the tax credit certainly can only help market psychology, and we believe this takes a worst-case scenario for home prices off the table, at least over the next six months or so," researchers said. "Home prices have a significant amount of serial auto-correlation not shared by most other asset classes, and, over the short run, momentum plays a significant role." Deutsche researchers added: "However, this psychological impact will also be more meaningful in regions not plagued by significant fundamental issues such as foreclosures, affordability, and unemployment." Write to Diana Golobay.