How Much Was That $8,000 Tax Credit Really Worth?

The most frequently asked question I hear these days is, ‘How’s the market now the tax credit program is over?’ This is a really good question. While I’ve been very busy, the fact is, showing traffic is down, and I’ve had fewer calls from first time home buyers. This will be a busy closing week, as many of the first time home buyers are going to be closing on the homes they contracted for in April. May will likely be one of the best closing months of the year.
Having said all that, lets look at what the long term benefits of the tax credit really add up to, compared to other factors at work in the market. The $8,000 credit, when used in conjunction with other programs, freed up cash for buyers who did not have adequate down payment resources otherwise. This of course adds buyers to the market. But it really only helped buyers in the lower portion of our market, since the credit only covered the down payment of an FHA loan on a $228,000 house.
Since most buyers, even 2nd and 3rd time buyers pay for most of their home with a loan, the bigger issue is payment size. $8,000 spread over 30 years at 5% interest is a payment of $42.95. To put that in perspective, interest rates have fluctuated in the 3 weeks since the tax credit ended from around 5.25%, to 4.75% (I actually received quotes of 4.5% on certain loans this weekend). On that $228,000 house, that is a swing in house payments of $69.66 per month. So how much was the tax credit really worth? If you didn’t have the cash, quite a bit. But for those with even $8,000 in cash of their own, they will save substantially more from lower interest rates than the credit was ever worth. How long will these nice rates last? Unlike tax credits, they don’t announce these in advance, so you just have to take advantage of them when they are there!