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Extra8/25/2009 1:30 PM ET

Tax credit lifts housing market

Two new reports show that home prices are stabilizing, and housing experts say the $8,000 tax incentive is revving up sales, especially for starter homes.

By Marilyn Lewis
MSN Money

Just as Cash for Clunkers helped pull automakers off the recession's rock bottom, a tax credit of up to $8,000 for first-time homebuyers is kick-starting the housing market.

Sales are up -- existing-home sales in July rose 7.2%, the largest month-to-month increase since 1999 -- and prices seem to be stabilizing. The S&P/Case-Shiller U.S. National Home Price Index of 20 cities, released today, showed its first quarterly increase in three years, and the Federal Housing Finance Agency's quarterly report (.pdf file), also released today, found purchase prices in 300 cities down less than 1% from the first quarter.

Housing experts credit three things: the $8,000 incentive, ultralow interest rates and a drop in home prices -- in some cases by as much as 50%. On the lower end of the market, that's meant multiple offers, even bidding wars, in some places.

Most of those sales are of lower-priced, starter homes. In late June, the National Association of Realtors measured a 39% increase in the sale of homes under $100,000 and a 9.4% rise in sales of homes priced between $100,000 and $250,000.

"We have had one of the best purchase markets in the lower end that I can recall," said CEO Leif Thomsen of Mortgage Master, an independent mortgage lender. "Normally, the summer is a very quiet time, and yet we are having record closings for purchases in July and August.

"Without it (the tax credit), we wouldn't be nearly where we are at this point."

Prices down for year, up for quarter

Though the S&P/Case-Shiller National Home Price Index dropped 14.9% from this time last year, it was a big improvement compared with the home-value record losses of 19.1% in this year's first quarter.

"This is the first time we have seen a positive quarter-over-quarter print in three years," said David M. Blitzer, the chairman of the index committee at Standard & Poor's. He spoke of "hints of an upward turn from a bottom."

Right now, prices are where they were in early 2003, he said. However, Blitzer pointed to "continued weakness" in some hard-hit cities. Detroit and Las Vegas, where prices have fallen from their 2006 highs by 54.3% and 45.3%, respectively, are "struggling severely." They were the only two cities measured whose values fell from May to June.

The Federal Housing Finance Agency's national home price index, which measures prices slightly differently and does not include mortgages over $417,000, showed values falling 0.7% nationally from the first quarter to the second quarter and 6.1% compared with this time last year. This, too, was hailed as good news because, though home values continued to fall, they dropped more slowly.

"This is further evidence that prices may be stabilizing for the nation as a whole," agency chief Edward J. DeMarco said.

The FHFA singled out New England as the weakest region in the U.S., with a 1.6% drop in prices from the first to second quarter. Strongest was the oil-rich West-South-Central region, including Oklahoma, Texas, Arkansas and Louisiana. There, home values grew 0.2% in the second quarter.

Credit produced immediate bump

The government's $8,000 tax credit targeted first-time buyers (technically, anyone who hasn't owned a home in the past three years) because they're unencumbered with homes to sell and could respond quickly to a stimulus.

"The tax credit was passed in the middle of February, and we saw an almost immediate response in housing starts, one that we expected, but not as early as it occurred," said David Crowe, the chief economist for the National Association of Home Builders. Monthly surveys of builders show that "the credit is working; they are getting traffic, and they are getting sales from customers using the credit."

Six in 10 real-estate agents told the National Association of Realtors, in a recent poll of 2,000 members, that the tax credit was attracting buyers who would not otherwise have purchased a home.

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Christian Menegatti, the head of global economic research for RGE Monitor, a financial-analytics company, agreed. "The improvements we have seen in existing-home sales have been very much explained by the tax cut. Not all, but very much," he said. "We are looking for this trend to continue through October" -- until just before the credit expires Nov. 30.

The homebuilders and Realtors groups are lobbying to extend the credit into 2010 and include more buyers, not just first-timers.

Tax credit doesn't get all the credit

Helping boost sales at the lower end of the housing market were low interest rates and low prices. The national median price fell to $181,800 in June, down 15.4% from the year before, when it was $215,000.

"The tax credit helps but, when you look at everything, this is one of the most-affordable periods in history," said Jerry Maguire, a senior loan officer with Mortgage Master's Walpole, Mass., office. "It's not unheard of for a first-time buyer right now to get a decent house at $250,000, where the same house was selling a few years ago at $375,000."

Continued: A fragile recovery

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