I think your suspicion is correct. However, you can charge other things and use the money for them for the downpayment. Having known a certain culture of people a little too well, I highly suspect there is some real scamming of the system taking place in order to get at the $8K. Also, I suspect the free money has extra appeal to the impulsive gambler type personality, and a fair amount of people will end up hurting themselves playing the game.

I mean, one of Bush’s biggest legacies was presiding over a massive increase in the homeownership %. But his efforts eventually backfired, because you can’t loan money to people who don’t have the means to pay it back.

I predict the govt. will keep enticing the consumption addicts to spend in an effort to keep the magic numbers illusion going. In the end, I think it will do more harm than good though.

BTW, I’m not so sure that for FHA you could borrow part of the down payment on your credit card. I’ll leave that for a mortgage person.

First a definition, http://www.math.uah.edu/stat/expect/Properties.xhtml

For a single property take the credit amount, which is not a RV, and multiply by the probability that a qualified home buyer will buy, which is a RV.

The pmf is clearly finite, and thus discrete, with each price point (or category) being a potential qualified buyer’s selection. Based on supply and demand theory, we have a monotonic probability mass function (pmf) if we restrict our domain to get rid of some absurdities on the very bottom end. Of course human behavior doesn’t always follow the rational player assumption.

One thing should be clear: the expiration of the tax credit can only have a downward pressure, possibly zero, on selling prices, with an upper bound of $8,000.

NOTE: This is not a rigorous development, but rather a simple way to measure the potential impact of the expiration f the first-time home buyer tax credit.

People addicted to credit are experts at working the system. For many, the free money from China equates to a free downpayment. Unfortunately, many of these people will end up losing their homes because what looks good on paper is difficult to carry out in real life.

The smarter con would buy the house using free China money for the down, refuse to make a single payment, and live there rent free for 2 years. At $1K/mo rent, he’ll get $24K free instead of a measly $8K. And if he can arrange for enough paper stave-offs, he will more than triple the $8K gift. IOW, anybody can use the easily available infinite leverage available right now to make a very large profit if they are willing to ruin their credit score. If your score is between 500 to 600, you might as well go for it.

The govt. is pumping money into the the stock market, the auto market, the housing market, etc. in order to fix prices above their true value and make the economic charts look better. The goal is to fool unaware people into jumping aboard the gravy train. Supposedly, this will permanently inflate the market. The problem is, unemployment is horrible, people are tapped out credit-wise, the housing correction has destroyed the perceived wealth of homeowners, mortgage delinquencies are setting new records, etc. So if the govt ends the cash for clunkers, $8K mortgage rebate, etc. all at once, the fluffy charts all the bulls are reading are going to look really bad. The only thing propping up this economy right now is govt. spending. Therefore, I don’t expect a reduction in free give-away programs. If anything, I expect an increase.

A third of loans are FHA. Most of the rest are guaranteed by the govt.. There is no real credit market out there. The only reason the banks are alive is because of govt. money and the suspension of the requirement to their mark assets to their real value. Thus, the banks can claim their worthless assets are worth billions. This makes good profits on paper, but it isn’t real. Investors made a fortune from Madoff up until his paper-scam collapsed. And that’s the final fate of suckers.

By Kary L. Krismer @ 5:

RE: BillE @ 4 – When you consider how leveraged many real estate transactions are, 8k is actually quite a bit. For someone doing FHA at the minimum down, it would replace their down payment on $242,000 of the transaction (after closing).

Exactly! And that’s pretty much the point in this supposedly stabilized market–people don’t have the money to buy houses, so the government borrows money from China and gives it to them. This is ultra-high risk lending. These people can’t even manage to scrape together a measly 3% of the purchase price, how is it that they are fit to borrow $250K? A very similarly risk model (subprime) recently nuked the entire world economy. The solution to fixing the mess these insane lending practices created–more of the same.

“We can’t solve problems by using the same kind of thinking we used when we created them.” Albert Einstein

They don’t get the money until sometime after closing, so they had to have had the downpayment prior to closing.

That’s the one thing I liked about this particular first time buyer program, and the state tried to ruin it by making the money available at closing. Fortunately they didn’t succeed.

well, an alternative argument might be that since March (stimulus enactment, stock market low, etc.), the ratio of closed sales to prior month pending has steadily improved, from 59% to nearly 73%.

will it reach historical average of 90% this year or any time soon? I doubt it.

Latch on to whatever data makes your case.

Oh, maybe I should be a little clearer in my thought process.

I do believe that prices are going down, but I am not willing to suggest that on December 1, 2009 all home prices will go down by $8,000.

Similarly with the loan limits. Once those are lowered, it will have downward pressure on home prices, but it certainly won’t adjust all the prices in the “gap” area down by the “gap” amount. (If a home is very close, then the reduction is very little. On the other end are the homes that were just above the conforming limits. These homes would need to be reduced by the entire gap, plus a little.)

These are two factors that have nothing but downward pressure on home prices. In my opinion there are plenty of more good factors that have a downward pressure on home prices. Very few things today have an upward pressure.

RE: buystocks @ 12 –

The prices won’t drop by 8k right after the expiration because not all buyers qualify.

The tax credit isn’t the only thing going away. There was also temporary high limit comforming loans created up to 567K that expire at the end of the year. Those became available in May and really helped the upper end homes start selling.

Breaking from the pattern we had seen in recent months, closed sales declined in August, falling even further below the pending sales levels from the previous months.

…but I guess I wasn’t clear enough, so here it is in chart form:

Hit this post for the background on that chart.

The prices won’t drop by 8k right after the expiration because not all buyers qualify.

Consider the person who wants to become a homeowner soon (say, within the next 6 to 12 months) and for whom the 8K tax credit means the difference between buying and not-buying. This is the marginal class of individuals to which the “stimulus” is really directed since they would represent actual “additional” sales.

Now a person like this who is facing a time-hack and who believes that deadline is credible, has to make a decision of whether to buy or not in order to close on something before December. If they choose to buy, they’ll make the deadline. If they “miss” the deadline it is probably because they chose not to buy.

If the deadline is extended by, say, 3 months at the last minute, I highly doubt that their package of reasons for having chosen not to buy under the incentive of the credit and the threat of the deadline will change significantly in the new period. Maybe a few of them will have unexpected fortune, or inventory or pricing will improve somewhat, but I doubt you’ll capture many more folks after the first effort “expires”.

RE: BillE @ 4 – When you consider how leveraged many real estate transactions are, 8k is actually quite a bit. For someone doing FHA at the minimum down, it would replace their down payment on $242,000 of the transaction (after closing).

Exactly! And that’s pretty much the point in this supposedly stabilized market–people don’t have the money to buy houses, so the government borrows money from China and gives it to them. This is ultra-high risk lending. These people can’t even manage to scrape together a measly 3% of the purchase price, how is it that they are fit to borrow $250K? A very similarly risk model (subprime) recently nuked the entire world economy. The solution to fixing the mess these insane lending practices created–more of the same.

“We can’t solve problems by using the same kind of thinking we used when we created them.” Albert Einstein

I am just saying you have to look at the pendings in the prior month or months vs. the present or recent closings to make a statement about divergence.

It is inaccurate headline.

Also, Tim didn’t graph out historical pendings, but I’d suspect it’s unusual that they go up in August, because in most years (all but 2003) the sales in September and October were down from August, so you wouldn’t expect to see rising pendings in August.

The thing that might give this pending number a bit of validity is the first time buyer credit. A lot of people might be trying to miss the closing rush at the end of November.

Shouldn’t the current month closed sales be compared to previous months pending sales to determine how much they have “diverged”?

The difference is 608 between August closings and July pendings.

The difference was 720 between July closings and June pendings.

The ratio went up to 72.6% from 70.6%

I don’t know how you can conclude this is diverging.

I am going to go out on a limb here, and I will probably fall, but I am not going to discount the month of November. I am not sure how many of the “first time home buyers” will close in that month, but there could be some of the normal December activity pulled forward. November is going to be a “we must close now, or never…” Those who would actually get the $8k benefit will probably demand a $8k reduction to close on or after December 1, and that won’t go well with sellers, or lenders in the case of short sales. I also note that the big incentive is to close as close as possible to November 30, so the money will be on loan to the government for a shorter period of time.

Google: Vacation. ;-)

One thing occurred to me. Greg plays very close attention to pendings, and that probably played a big role in his prediction of 2000 sales in a month by now.

Better wording is “favorable (F) or unfavorable (U).”

Also I am not sure if a reduction/increase in closed sales is favorable or unfavorable for buyers. Why would an increase in sales be favorable for buyers? Why would an increase in sales be unfavorable for buyers?

Clearly increases (positive) in prices are favorable for sellers and unfavorable for buyers.