It is always interesting to see the effects of government policy. As most of you know, the federal government offered an $8000 tax credit to first time home Buyers and a $6500 tax credit to current homeowners who purchased another home. To obtain the credit, Buyers had to be under contract with a home no later than April 30, 2010 and had to close by June 30, 2010 (Congress did extend the June 30 closing date to September 30 at the end of June). It is now very clear that this tax credit was successful in driving Buyers to purchase homes in metro Denver. But the big question now is what will happen to the real estate market without the tax credit?

To answer where I see the market going, I think it is important to quantify the effect the tax credit had on the metro Denver real estate market. I looked at data from the first six months of 2009 (when the tax credit did not exist) and the first six months of 2010 to see what happened to closed sales and under contracts. A home goes “under contract” when a Seller accepts and signs an offer from a Buyer. A home is “closed” when the Seller actually transfers the title to the Buyer, which usually occurs 30 to 45 days after going under contract. The data I reference is strictly for single family homes, but a similar effect was seen in the condo/townhome market as well.

During the first six months of 2010, “closed” single family home sales were 7.0% higher than the first six months of 2009. But this data alone does not tell me whether the increase in closings was due to the tax credit or due to a real improvement in the real estate market.

The tax credit effect is very evident when you look at the homes placed “under contract” during the first six months of the year. Remember that homes had to be placed under contract by April 30th to qualify for the tax credit. In January through April of 2010, 16,152 homes were placed under contract in metro Denver. This was an 11.0% increase in activity compared to the 14,546 homes placed under contract in January through April of 2009. In May and June of 2010, 6,303 homes were placed under contract in metro Denver. This is a 28.1% decrease from the 8,769 homes placed under contract in May and June in 2009. If the increase in closed units was due to a real improvement in the real estate market, the May and June under contracts would have continued to exceed the 2009 numbers. This was not the case so we have proof the tax credit greatly affected the market.

In addition, the tax credit did not generate any significant amount of new Buyers. It just encouraged people that were planning on buying during the summer of 2010 to purchase before the tax credit expired. The Buyers who would have purchased in May and June instead purchased in the first four months of the year to take advantage of the tax credit. The tax credit drove an additional 1,606 homes sales in the first four months of 2010 compared to 2009. But the “hangover” from the tax credit resulted in 2,466 fewer sales in May and June compared to 2009. I am worried that the “hangover” is larger than the benefit gained in January through April. To me this indicates that sales at the end of 2010 should be below the number of sales in 2009. July and August will be the barometer of how long the “hangover” lasts and the severity of the “hangover”.

Even though the number of homes available for sale at the end of June were up 9.8% in metro Denver compared to June 2009, the 7.0% increase in closed sales in the first half of the year have kept the months in inventory metric I use to gauge inventory levels consistent. At the end of June, months in inventory was at 6.3 months. 5-8 months in inventory is considered a balanced market where prices stay static and don’t increase or decrease. HOWEVER, if I assume the first half sales were over-inflated due to the tax credit, the months in inventory level is closer to 7.2 months in inventory. This still is not a bad number, but it is increasing.

Home prices continue to stay steady on average in metro Denver. The Standard and Poor’s Case Shiller Home Price Index for April 2010 (the most recent month available) shows the average home price is up 4.4% over the past 12 months. This is the 6th month in a row that year over year prices have been higher. However, this average is being driven mainly by home sales in the sub-$400,000 market. Prices of higher end homes are definitely continuing to fall.

It is interesting to note that during the last home price downturn in 1987-1989 in metro Denver, once the Case Shiller index turned from a depreciating market to an appreciating market in November of 1989, the index continued to show appreciation until December 2006. I am eagerly waiting to see what happens with the index when the July and August numbers are released. These will be the first two months where the tax credit was not available and should have lower sales levels due to the hangover. If prices stayed steady after the credit expired, that bodes well for pricing overall for the rest of 2010. If prices decline substantially, pricing for the rest of 2010 will be challenged.

Even with all of the turmoil due to the tax credit, I continue to believe 2010 will be a very similar statistical year to 2009 in real estate. Generally, prices will not move substantially up or down, except at the high end of the market where prices will continue to fall. I do believe now that 2010 units sold will be slightly lower than 2009 based upon the May and June sales.

If you would like to know more about the real estate market in your neighborhood, or what has happened to the value of your home specifically in the past year, contact me today at (303) 886-3437 or at doug@doughutchinshomes.com